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, 1999 Commission File No. 1-6663
COLONIAL COMMERCIAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
New York 11-2037182
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(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
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
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
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
(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
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Revenues for the fiscal year ended December 31, 1999 were $42,258,954.
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $12,147,605 as of March 27, 2000.
Indicate the number of shares outstanding of Registrant's Common Stock and
Convertible Preferred Stock as of March 27,2000.
Common Stock, par value $.05 per share - 1,523,521 shares. Convertible Preferred
Stock par value $.05 per share - 1,532,525 shares.
Documents Incorporated by Reference
Document Part
Registrant's 2000 Proxy Statement for Annual Meeting
of Shareholders on June 7,2000 III
Registrant's 1999 Annual Report to Shareholders I, II
<PAGE>
PART I.
Item 1(a) Business Developments
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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 March 24, 2000, the Company acquired BRS Products, Inc. ("BRS") a
manufacturer of hollow metal doors and frames, pursuant to its prior agreement
to fund BRS's plan of reorganization. The BRS corporate name was changed to
Well-Bilt Steel Products, Inc. ("Well-Bilt").
On June 25, 1999, the Company purchased all of the assets, subject to
all of the liabilities of Universal Supply Group, Inc. ("Universal") for
approximately $10.9 million in cash. In connection with the acquisition,
Colonial entered into a $16 million secured lending facility with LaSalle
National Bank. Colonial financed the acquisition with $4.0 million of existing
cash and a $6.5 million borrowing under the new facility. The borrowings are
secured by substantially all of the assets of Universal and Atlantic Hardware
and Supply Corporation ("Atlantic"), a wholly-owned subsidiary of Colonial, as
well as the corporate guarantee of the Company.
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.
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.
Item 1(b) Business Description
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Since the acquisition of Universal in 1999 and the 1995 acquisition of
Atlantic, the Registrant's principal business activity is the distribution of
builders' hardware, which is described in more detail below and climate control
systems, heating, ventilation and air conditioning equipment to building
contractors, which is also described 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
doorframes 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,
doorknobs, 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.
<PAGE>
Atlantic had approximately 475 customers in 1999. No customer accounted for
more than 9.5% of Atlantic's sales in 1999. Atlantic believes that the loss of
any one customer would not have a material adverse effect on its business.
As of December 31, 1999, Atlantic had $13,425,000 in firm backlog of
orders. Atlantic expects that approximately 95% of the backlog of orders as of
December 31, 1999 will be filled within the current fiscal year. Atlantic's
business is not subject to significant seasonal variations.
Atlantic purchases products from approximately 390 suppliers. In 1999, 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.
Universal - Climate Control Systems, Heating, Ventilation And Air Conditioning
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Equipment
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Universal is a distributor of heating, ventilation, air conditioning
equipment(HVAC) and climate control systems. Universal's products are marketed
primarily to HVAC contractors, who, in turn, sell such products to residential,
commercial and industrial customers. Universal also provides technical field
support, in-house training and climate control consultation for engineers and
installers.
Universal had approximately 4,000 customers in 1999. No customer
accounted for more than 4.6% of Universal's sales in 1999. Universal believes
that the loss of any one customer would not have a material adverse effect on
its business.
Universal purchases products from approximately 500 suppliers. In
1999, two suppliers accounted for 39.5% of Universal's purchases. The loss of
one of these suppliers could have a material adverse effect upon its business
for a short-term period. Universal believes that the loss of any one of its
other suppliers would not have a material adverse effect upon its business.
Universal competes primarily with other distributors in its
geographical region. Universal believes it's one of the largest HVAC
distributors in northern New Jersey. Universal believes it maintains a
competitive edge by providing in-house training and technical field support to
its customers.
<PAGE>
Management and Employees
- ------------------------
As of December 31, 1999, the Registrant had 155 employees, of whom two were
executive officers at its corporate offices in Levittown, New York. Sixty two
(62) of the employees are employed by Atlantic and eight-nine (89) employees are
employed by Universal. 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 16,000
square feet at 5-20 54th Avenue, Long Island City, New York under a lease
expiring in 2009. Atlantic also maintains leased sales offices and warehouse
space in Bensenville, Illinois; Norcross, Georgia and Bensalem, Pennsylvania.
Universal maintains its general and warehouse office in Hawthorne,
New Jersey and additional warehouses in Bogota, Augusta, North Brunswick, Cedar
Knolls, Wharton and Rochelle Park, New Jersey and Long Island City and New
Hampton, New York.
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
The information required to be provided is incorporated by reference from
page 3 of the Registrant's 1999 Annual Report to Stockholders.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
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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 1999 Annual Report to Stockholders under the
caption, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<PAGE>
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, 1999 and 1998 and for each of the years in the three-year
period ended December 31, 1999, are incorporated herein by reference from pages
8 through 30 of the Registrant's 1999 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 2000 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.
Name, Age Business Experience
and Position During Past Five Years
------------ ----------------------
Bernard Korn, 74 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, 53 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 2000 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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The information required to be provided is incorporated by reference
to Registrant's 2000 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 11. Security Ownership of Certain Beneficial Owners and
- -------- ---------------------------------------------------
Management.
- -----------
The information required to be provided is incorporated by reference
to Registrant's 2000 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.
<PAGE>
Item 12. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information required to be provided is incorporated by reference to the
Registrant's 2000 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
1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
COLONIAL COMMERCIAL CORP.
(Registrant)
By: /s/ Bernard Korn
----------------
Bernard Korn, President
By: /s/ James W. Stewart
--------------------
James W. Stewart
Treasurer, Chief Financial
And Accounting Officer
Dated: March 29 , 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been duly signed below on March 29, 2000 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
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Executive Vice President, Treasurer
And Secretary/Director
By: /s/ Gerald S. Deutsch
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Gerald S. Deutsch, Director
By: /s/ William Koon
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William Koon, Director
By: /s/ Donald K. MacNeill
----------------------
Donald K. MacNeill
By: /s/ Ronald Miller
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Ronald Miller, Director
By: /s/ Jack Rose
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Jack Rose, Director
By: /s/ Paul Selden
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Paul Selden, Director
By: /s/ Carl L. Sussman
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Carl l. Sussman
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Item 1
Incorporated by
Filed Reference From
Exhibits Herewith Form Date Exhibit
- -------- -------- ---- ---- ------
<C> <S> <C> <C> <C> <C>
3 (a) Certificate of Incorporation of
Registrant 8-K 1/5/83 1
(i ) Certificate of Amendment of
the Certificate of Incorporation
Re: Authorized Common and
Convertible Preferred Shares
(b) By-Laws of Registrant 8-K 1/5/83 1
10 (a) Employment Agreement dated as
of January 1, 1999 between
Registrant and Bernard Korn 10-KSB 3/31/99 10(a)
(b) Employment Agreement dated as
of January 1, 2000 between
Registrant and James W. Stewart Yes
(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 & Supply Corp.
(iii) Employment Agreement dated
January 1, 1999 between
Atlantic Hardware and Supply
Corporation and Paul Selden 10-KSB 3/31/99 10(g)(iii)
(g) Purchase agreement dated March,
25, 1999 for business and assets
subject to certain liabilities of
Universal Supply Group, Inc. 10-KSB 12/31/98 10(g)
(i) Amendment No. 1 dated June
25, 1999 to Purchase Agreement
dated March 25, 1999 8-K 7/8/99 10(a)(ii)
(ii) Employment agreement dated
June 25, 1999 between Colonial
Commercial Sub Corp. and
William Pagano 8-K 7/8/99 10(a)(iii)
(iii) Loan and Security Agreement
dated June 24, 1999 between
LaSalle Bank National Associa-
tion and Colonial Commercial
Sub Corp. 8-K 7/8/99 10(a)(iv)
<PAGE>
INDEX TO EXHIBITS
Item 1
Incorporated by
Filed Reference From
Exhibits Herewith Form Date Exhibit
- --------- -------- ---- --- ------
(iv) Demand Note dated June 24,
1999 between LaSalle Bank
National Association and
Colonial Commercial Sub Corp. 8-K 7/8/99 10(a)(v)
(v) Guaranty of all liabilities and
Security Agreement of Colonial
Commercial Sub Corp. by
Colonial Commercial Corp. to
LaSalle Bank National Associa-
tion dated June 24, 1999 8-K 7/8/99 10(a)(vi)
(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 )
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,
1999. 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
</TABLE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of January 1, 2000 by and between Colonial
Commercial Corp., a New York corporation with its principal office at 3601
Hempstead Turnpike, Ste 121-I, Levittown, New York 11756-1315 (the "Company")
and James W. Stewart, residing at 47 Richie Court, St. James, New York 11780
(the "Employee").
ARTICLE I
EMPLOYMENT; TERM; DUTIES
1.01. Employment. Upon the terms and conditions hereinafter set
forth, the Company continues to employ the Employee, and the Employee hereby
accepts the continued employment, as Executive Vice President of the Company.
Throughout the term, Employee shall engage in no other business activities other
than the passive supervision of his investments.
1.02. Term. The Employee's employment hereunder shall be for a term
(the "Term") commencing as of this date (the "Commencement date") and
terminating at the close of business on the fifth anniversary of the
Commencement Date. A "Contract Year" shall commence on January 1 and terminate
on December 31.
1.03. Duties. During the Term, the Employee shall perform such
duties, consistent with his position hereunder, as may be assigned to him from
time to time by the Board of Directors. The Employee shall devote his best
efforts and his entire time, attention and energies, during regular working
hours, to the performance of his duties hereunder and to the furtherance of the
business and interests of the Company, its subsidiary and affiliate companies.
ARTICLE II
COMPENSATION
2.01. Compensation. For all services rendered by the Employee hereunder
and all covenants and conditions undertaken by him pursuant to this Agreement,
the Company shall pay, and the Employee shall accept a salary at the rate of
$200,000 per annum for the first two years, $225,000 for the next two years and
$250,000 for the last year. Compensation shall be payable not less frequently
than in bi-weekly installments
2.02 Incentive Compensation. Beginning for the calendar year 2000 and
for each of the calendar years 2000 through 2004, the Employee shall receive, as
Incentive Compensation, a percentage of the Incentive Compensation Base.
Incentive Compensation Base for any year shall be the difference between the
Computed Compensation Base for that year in excess of the Computed Compensation
Base for 1999 (which is expected to be known by March 31, 2000). Computed
Compensation Base shall mean the Company's consolidated pre-tax earnings (as
determined by the Company, in accordance with generally accepted auditing
standards consistent with those used by Company), plus the amount of any
deductions from such earnings, which are made in such statements for Incentive
Compensation under this Agreement, less income (or plus losses) from the
disposition of subsidiaries, fixed assets, intangibles or increases (or plus
decreases, other than ordinary writeoffs) in deferred tax assets. Incentive
Compensation for any year, if any, will be paid within 30 days following receipt
by the Company of the Independent Accountants' report for such year involved and
said report shall be binding and conclusive on the calculation of net earnings
and Incentive Compensation. The percentage for the Incentive Compensation Base
shall be:
2% of first$ 200,000
4% of next $ 200,000
6% of next $ 200,000
8% of next $ 400,000
10% of over $1,000,000
<PAGE>
EXAMPLE:
Assume Computed Compensation Base for calendar year 1999 is $1 million,
Assume Computed Compensation Base for 2001 is $2 million,
Then, the Incentive Compensation Base for 2001 is $1,000,000
---------
Incentive Compensation:
2% of first$ 200,000 4,000
4% of next $ 200,000 8,000
6% of next $ 200,000 12,000
8% of next $ 400,000 32,000
10% of over $1,000,000 --
--------
Incentive for 2001, based on foregoing percentages $ 56,000
======
(To be paid in 2002)
Incentive compensation will in no event exceed 100% of annual base pay in any
year.
2.03. Deductions. The Company shall deduct from the compensation
described in Section 2.01 and 2.02 any federal, state or local withholding
taxes, social security contributions and any other amounts which may be required
to be deducted or withheld by the Company pursuant to any federal, state or city
laws, rules or regulations.
2.04. Disability Adjustments. Any compensation otherwise payable to the
Employee pursuant to Section 2.01 during any Disability Period (as that term is
hereinafter defined) shall be reduced by any amounts payable to the Employee for
loss of earnings or the like under any insurance plan or policy the premiums for
which are paid for in their entirety by the Company.
ARTICLE III
BENEFITS; EXPENSES
3.01. Fringe Benefits. During the Term, the Employee shall be
entitled to participate, in amounts commensurate with the Employee's position
hereunder, in (a) such group life, health, accident, disability or
hospitalization insurance plans as the Company may make available to its other
executive employees, subject to insurance underwriting, and (b) any incentive
compensation, bonus, pension or similar plan of the Company presently in effect
or hereafter adopted for the benefit of its executive employees as a group.
3.02. Automobile. During the Term, the Company shall furnish the
Employee with an automobile (including the replacement thereof), of such make,
model and year as the Employee shall determine, for use by the Employee in
connection with the performance of his duties hereunder. Upon presentation of an
itemized account thereof, with such substantiation as the Company shall require,
the Company shall pay or reimburse the Employee for the reasonable and necessary
expenses of the maintenance and operation of such automobile in connection with
the performance of his duties hereunder.
3.03. Services. During the Term, the Company shall furnish the Employee
with secretarial and such other services and facilities sufficient to enable the
Employee to perform his duties, and suitable to the Employee's position
hereunder.
3.04. Expenses. Upon presentation of an itemized account thereof, with
such substantiation as the Company shall require, the Company shall pay or
reimburse the Employee for the reasonable and necessary expenses directly and
properly incurred by the Employee in connection with the performance of his
duties hereunder.
<PAGE>
3.05. Vacations. During the Term, the Employee shall be entitled to
paid holidays and paid vacations, in accordance with the policy of the Company
as determined by the Board of Directors; provided, however, that the Employee
shall be entitled to not less than four weeks paid vacation during each year of
the Term, to be taken at times determined by the Employee.
3.06. Location. Notwithstanding anything which may be contained
herein to the contrary, the Employee's office shall be located in Nassau or
Suffolk Counties, New York, and the performance of this duties hereunder shall
not require his presence outside of such counties, if the Employee shall object
thereto.
ARTICLE IV
TERMINATION
4.01. Termination No Change in Control. The employment of the
Employee, and the obligations of the Employee and the Company hereunder, shall
cease and terminate (except as otherwise specifically provided in this
Agreement) upon the first to occur on the following dates (the "Termination
Date") described in this Section 4.01:
(a)The date of expiration by its terms of the Term;
(b)The date of death of the Employee; provided, however,
notwithstanding the foregoing:
(i) the lump sum of Five Thousand ($5,000) Dollars shall be paid
to the Employee's widow a death benefit (as provided by the
Internal Revenue Code); and
(ii) the Employee's compensation, as determined in accordance
with Section 2.01, shall be paid for a period of one (1)
year irrespective of whether such one-year period exceeds
the expiration date of the Term) to the Employee's widow.
(iii) the Employee's compensation, as determined in accordance
with Section 2.02, shall be paid only for the current year
and annualized by taking a portion of the computed amount
for the full year (when it is determinable) and multiplying
it by a fraction, the numerator of which is the number of
days in the year prior to the death of the Employee and the
denominator of which is 365.
(c) the date on which the Company by notice terminates Employee's
employment for cause. At any time during the term of this
Agreement, the Company may discharge the Employee for cause and
terminate this Agreement without any further liability hereunder
to the Employee or His estate, except to pay any accrued, but
unpaid, salary, but not Incentive Compensation to him. In the
event of such termination, Employee agrees he shall also be
deemed to have resigned from the Company, effective as of the
date of such termination. For purposes of this Agreement, a
"discharge for cause" shall mean termination of the Employee upon
written notification to the Employee limited,
4.02. Termination Change in Control.
(a) If at any time within five (5) years following a Change of
Control, it discharges Employee or refuses to extend the Term of Employment for
at least two years beyond the existing term for any reason other than "just
cause", or if within one year after a Change of Control Employee resigns from
his employment with Employer for any reason whatsoever,
<PAGE>
( i ) The Employer will pay to Employee immediately after such
termination of employment a lump-sum cash payment equal to 300% of the aggregate
of (A) his then-current annual base salary (or, if his base salary has been
reduced at any time after the Change of Control, his base salary in effect prior
to the reduction), (B) the highest amount of Incentive Compensation or other
cash bonus paid to Employee during the three calendar years immediately prior to
the change of control, (C) the annual cost to the employer of any benefits then
provided to Employee, including the cost of insurance, even if those benefits
are in whole or in part self-insured by Employer and (D) the amount contributed
by the Employer on behalf of the Employee for the calendar year ending
immediately prior to the termination of any retirement of the Employer.
(ii) All of Employee's outstanding stock options, restricted shares and
other similar incentive interests and rights that have not vested or been
exercised will become immediately and fully vested and exercisable and will
remain exercisable throughout the original term of such option, notwithstanding
any provision to the contrary regarding termination of employment in the stock
option agreement issued in respect of such stock option or any other stock
option plan of Employer pursuant to which such stock option may have been
granted.
(iii) Employee, together with his dependents, will continue, following
such termination of employment, to participate fully with no contribution to
cost, in all accident and health plans maintained or sponsored by the Employer
in which he participated immediately prior to the Change of Control, for the
term provided under the Consolidated Omnibus Budget Reconciliation Act.
(iv) The Employer will promptly reimburse Employee for any and all
legal fees and expenses incurred by him as a result of such termination of
employment, including without limitation all fees and expenses incurred in
connection with efforts to enforce the provisions of this Agreement.
All compensation received by Employee pursuant to this subsection is
collectively referred to herein as the "Termination Payment." Employee's
employment (whether pursuant to the term of this Agreement or any other plan,
arrangement or agreement with Employer), shall be treated as "parachute
payments" within the meaning of Section 280G of the Code, and "excess parachute
payments" within the meaning of Section 280G shall be treated as subject to the
Excises Tax, unless in the opinion of tax counsel selected by Employer and
acceptable to Employee such other payments or benefits (in whole or in part) do
not constitute parachute payments, or such excess parachute payments (in whole
or in part) represent, reasonable compensation for services actually rendered
within the meaning of Section 280G of the Code, (ii) the amount of Termination
Payment, which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Termination Payment or (B) the amount
of excess parachute payments within the meaning of Section 280G after applying
clause (i ) above, and (iii) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by Employer's independent auditors in
accordance with the principles of Sections 280G of the Code. For purposes of
determining the amount of the Gross-Up Payment, Employee shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
locality that imposes such tax on the date of termination of Employee's
employment, net of the maximum reduction in federal income taxes, which could be
obtained from deduction of such state and local taxes. In the event that the
Excise "Tax is subsequently determined to be less than the amount taken into
account hereunder at the time of the termination of Employee's employment,
Employee shall repay to Employer at the time that the amount of such reduction
in Excise Tax is finally determined the portion of the Gross-Up payment
attributable to such reduction, plus interest on the amount of such repayment at
the rate provided in Section 1274 of the Code. In the event that the Excise Tax
is determined to exceed the amount taken into account hereunder at the time of
the termination of Employee's employment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), Employer shall make an additional Gross-Up Payment in respect of such
excess (plus any interest payable with respect to such excess) at the time that
the amount of such excess is finally determined.
<PAGE>
(c) For purposes of this Agreement, a "Change of Control" of Employer
shall be deemed to have occurred if:
(i) any individual, corporation, partnership, company, or other entity
(a "Person"), which term shall include a "group" (within the meaning of section
13(d) of the Securities Exchange Act of 1934 (the "Act"), who does not currently
own directly or indirectly 20% or more of the combined voting power of
Colonial's outstanding securities, becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Act) of securities of Colonial representing more than 40%
of the combined voting power of Colonial's then-outstanding securities.
(ii) the stockholders of Colonial approve a merger or consolidation of
Colonial with any other corporation, other than a merger or consolidation which
would result in the voting securities of Colonial's outstanding immediately
prior thereto continuing to represent (either by remaining outstanding, or by
being converted into voting securities of the surviving entity) at least 80% of
the combined voting power of the voting securities of Colonial or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders approve a plan of complete liquidation of Colonial or an agreement
for the sale or disposition by the Employer of all, substantially all, of the
Employer's assets; PROVIDED, HOWEVER, that if the merger, plan of liquidation or
sale of substantially all assets is not consummated following such stockholder
approval and the transaction is abandoned, then the Change of Control shall be
deemed not to have occurred.
(iii) the Board of Directors of Colonial ceases to consist of a
majority of Continuing Directors. For purposes hereof, "Continuing Director"
shall mean a member of the Board of Directors of Colonial, who either (A) was a
member of the Board of Directors as of the date of this agreement or (B) was
nominated or appointed (before initial election as a director) to serve as a
director by a majority of the then Continuing Directors and was approved in
writing by Employee.
ARTICLE V
5.01. Disability. In the event that the Employee shall have been
unable, by reason of illness or incapacity, to perform the duties required of
him pursuant to this Agreement, for a period of twelve (12) consecutive months
(the "Disability Period"), the Company may give notice (the "Disability Notice")
to the Employee of the discontinuance of his services as Executive Vice
President of the Company provided, however, notwithstanding the foregoing, this
Agreement shall continue in full force and effect except as follows:
(a) Section 1.03 shall become inoperative on the date on which
the Disability Notice is given. In lieu of his duties as
Executive Vice President, the duties of the Employee shall
be, to the extent permitted by his illness or incapacity, to
advise and counsel the officers and directors of the Company
with respect to the affairs and business of the Company; and
(b) The Company shall continue to pay and the Employee shall
accept, compensation in an amount determined in accordance
with Section 2.01 for the Contract Year in which the
Disability Notice shall have been given such compensation to
be paid to the Employee for the remainder of such Contract
Year and for the next succeeding Contract Year of the Term,
irrespective of the amount or nature of the services
rendered by the Employee pursuant to Section 5.01 (a).
(c ) Notwithstanding anything herein contained to the contrary,
in the event that, prior to the delivery of the notice
specified in this Section 5.01, the Employee shall resume
the full-time performance of his duties hereunder for a
period of not less than ten (10) consecutive working days,
the Company may not give the Employee the Disability Notice.
(d) The Employee's compensation, as determined in accordance
with Section 2.02, shall be paid only for the current year
and annualized by taking a portion of the computed amount
for the full year (when it is determinable) and multiplying
it by a fraction, the numerator of which is the number of
days in the year prior to the date of the Disability Notice,
and the denominator of which is 365.
<PAGE>
ARTICLE VI
RESTRICTIVE COVENANTS
6.01. Non-Disclosure. Subject to the Company fully performing all of
the terms and obligations required of it under this Agreement, including,
without limitation, the payment of compensation, the Employee shall not disclose
or furnish to any other person, firm or corporation (the "Entity") during his
employment and for three years thereafter, except in the course of the
performance of his duties hereunder, the following:
(a) any information relating to any process, technique or
procedure used by the Company, including, without
limitation, computer programs and methods of evaluation and
pricing and marketing techniques; or
(b) any information relating to the operations or financial
status of the Company, including, without limitation, all
financial data and sources of financing, which is not
specifically a matter of public record; or
(c) any information of a confidential nature obtained as a
result of his prior, present or future relationship with the
Company, which is not specifically a matter of public
record; or
(d) any trade secrets of the Company; or
(e) the name, address or other information relating to any
customer or debtor of the Company.
6.02. Non-Competition. Subject to the Company fully performing all of
the terms and obligations required of it under this Agreement, including,
without limitation, the payment of compensation, the Employee shall not, from
the date hereof and until one year after the termination of his employment with
the Company (the "Restriction Period"):
6.05. Reasonable Restrictions. The parties acknowledge that the
foregoing restrictions, the duration and territorial scope thereof as set forth
in this Article VI, are under all of the circumstances reasonable and necessary
for the protection of the Company and its business.
ARTICLE VII
CERTAIN REMEDIES
7.01. Lump Sum Payment. From and after any breach by the Company of
its obligations under this Agreement which is not cured within 10 days after the
Employee gives notice thereof to the Company, the Employee shall be entitled at
any time by notice to the Company to terminate his obligations to the Company
hereunder and forthwith to receive from the Company in a lump sum, and without
present value discount, the entire aggregate amount which would have been
payable by the Company to Employee under Section 2.01 had Employee been employed
hereunder for the entire Term. Interest shall accrue on such lump sum obligation
at the annual rate of 10% per annum, and shall be payable on demand.
7.02. Litigation Costs. Should Employee prevail in any litigation
relating to his employment or this Agreement, the Company shall forthwith
reimburse Employee for all of his legal fees and costs. Should Employee prevail
only in part in any such litigation, the Company shall forthwith reimburse him
for a pro rata portion of his legal fees and costs.
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.01. Assignment. This Agreement shall not be assigned by either party,
except that the Company shall have the right to assign its rights hereunder to
any parent, subsidiary and affiliate of, or successor to, the Company.
8.02. Binding Effect. This Agreement shall extend to and be binding
upon the Employee, his legal representatives, heirs and distributees, and upon
the Company, its successors and assigns.
8.03. Notices. Any notice required or permitted to be given under
this Agreement to either party shall be sufficient if in writing and if sent by
registered or certified mail, return receipt requested, to the address of such
party hereinabove set forth, or to such other address as such party may
hereafter designate by a notice given to the other party in the manner provided
in this Section 8.03.
8.04. Waiver. A waiver by a party hereto of a breach of any term,
covenant or condition of this Agreement by the other party hereto shall not
operate or be construed as waiver of any other or subsequent breach by such
party of the same or any other term, covenant or condition hereof.
8.05. Prior Agreements. Any and all prior Agreements between the
Company and the Employee, whether written or oral, between the parties, relating
to any and all matters covered by, and contained or otherwise dealt with in this
Agreement are hereby canceled and terminated.
8.06. Entire Agreement. This Agreement sets forth the entire Agreement
between the parties with respect to the subject matter hereof and no waiver,
modification, change or amendment of any of its provisions shall be valid unless
in writing and signed by the party against whom such claimed waiver,
modification, change or amendment is sought to be enforced.
8.07. Authority. The parties severally represent and warrant that they
have the power, authority and right to enter into this Agreement and to carry
out and perform the terms; covenants and conditions hereof.
8.08. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York. The federal and state
courts in Nassau County, New York shall have exclusive jurisdiction on all
matters relating to this Agreement
8.09. Severability. In the event that any of the provisions of this
Agreement, or any portion thereof, shall be held to be invalid or unenforceable,
the validity and enforceability of the remaining provisions shall not be
affected or impaired, but shall remain in full force and effect.
8.10. Titles. The titles of the Articles and Sections of this Agreement
are inserted merely for convenience and ease of reference and shall not affect
or modify the meaning of any of the terms, covenants or conditions of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and date first about written.
COLONIAL COMMERCIAL CORP.
BY:/s/ Bernard Korn, President
---------------------------
(Title)
/s/James W. Stewart
-------------------
(Employee)
EXHIBIT 13
COLONIAL COMMERCIAL CORP.
ANNUAL REPORT
1999
<PAGE>
TO OUR STOCKHOLDERS:
Approximately five years ago, your Company's executive management team decided
to focus upon building a solid base of recurring earnings as the most effective
way to enhance shareholder value. During the next several years, we liquidated
our non-operating investments and discontinued our activities in the financial
services industry, at a substantial overall profit, and launched a selective
acquisition strategy within the $40 billion building-related products industry.
We have been satisfied with the results of this strategy to date, and I am
pleased to report upon your Company's accomplishments during the year ended
December 31, 1999.
Highlights for the year included:
-- A 67% expansion in revenues to $42.3 million, compared with $25.2
million in 1998;
-- A 96% increase in income from operations, which reached $1.8 million
versus income from operations of $.9 million in the previous year;
-- Earnings per share (diluted) were $0.29 compared with 1998 diluted EPS
of $1.23. The 1998 earnings included $0.93 per diluted share from
one-time gains on securities and land sales;
-- An increase of 121% in operating "cash" earnings per diluted share,
which reached $0.42, compared with $0.20 in 1998. We define "cash"
earnings as earnings before non-cash charges for federal income tax
and intangibles, reduced by the amortization of negative goodwill. We
consider cash earnings to be more representative of Colonial's
operating performance, since most of the federal income tax provision
has no cash impact;
-- The acquisition of Universal Supply Group in July, which more than
doubled our annualized revenues; and
-- The negotiation of an agreement under which our Atlantic Hardware and
Supply Corporation subsidiary ("Atlantic") would acquire BRS Products,
a manufacturer of hollow metal doors and security detention doors.
The acquisition of BRS Products, Inc. was completed during the first quarter of
FY2000. Our current operating companies include Atlantic (which includes the
operations of BRS Products, Inc.) and Universal Supply Group, Inc.
("Universal"), and our annualized revenue "run rate" now approximates $70
million on a consolidated basis. Through our subsidiaries, we manufacture and/or
distribute doors, door hardware, climate control systems and heating/ventilation
equipment to building contractors and architectural firms, primarily in the
eastern United States.
We have been extremely pleased with our investment in Atlantic. Since acquiring
the company less than five years ago for $3.8 million, Atlantic has generated
pretax earnings totaling more than $5.4 million. We believe Atlantic is ideally
positioned to increase its market share and to expand geographically, by
leveraging its 50+ year reputation for quality and service as a leading contract
hardware distributor in the northeastern United States. Its recent purchase of
BRS Products, Inc. out of bankruptcy proceedings should increase its sales
annually by more than $7 million and allow Atlantic to provide a more complete
line of door-related products to its new and existing customers. For the year
ended December 31, 1999, Atlantic had operating income of $1,570,000 on sales of
$25.7 million.
In July 1999, we completed the acquisition of Universal for approximately $10.9
million in cash - more than doubling Colonial's annualized revenues in the
process. Universal is a leading distributor of climate controls and heating and
air conditioning equipment in the New York metropolitan area. The newly-acquired
company contributed operating income of $899,000 and net sales of $16.6 million
to Colonial's consolidated results during the second half of 1999. The outlook
for continued growth at Universal is excellent, as management expands its market
share by developing new revenue streams,
<PAGE>
expanding the portfolio of value-added services available to customers, and
selectively pursuing acquisitions.
As we stand on the threshold of a new century, I am proud to report that
Colonial has achieved its objective of building a solid base of recurring
earnings from operations. Operating cash flows are further enhanced by the
utilization of substantial tax loss carryforwards available to the Company. Our
subsidiaries participate in large, defined markets, which offer opportunities
for additional growth by acquisition. With a strong cash position, access to
sources of commercial credit and an established group of operating companies
with successful business models, we face the future with great optimism. We are
committed not to being the "biggest", but one of the "best" companies in the
building-related products industry, and our focus is upon the enhancement of
shareholder value.
I look forward to reporting upon your Company's further progress during FY2000,
which we expect to be another year of impressive growth in both sales and
earnings. As always, on behalf of management and the Board of Directors, I would
like to express our appreciation for the continued support of our employees,
customers, vendors and shareholders.
Respectfully submitted,
Bernard Korn
Chairman of the Board and President
April 9, 2000
<PAGE>
CORPORATE PROFILE
Colonial Commercial Corp. ("Colonial"), through its subsidiaries, is a
distributor of doors and door hardware, climate control systems and
heating/ventilation equipment to building contractors and architectural firms.
The Company also manufactures hollow metal doors for commercial security and
detention applications. Colonial's products are installed in commercial,
residential and institutional structures, including office buildings, homes,
hospitals, prisons, schools, hotels, government facilities and apartment
buildings.
Atlantic Hardware and Supply Corporation ("Atlantic") (100% owned by Colonial),
founded in 1946, distributes door hardware, doors and door frames, primarily to
building contractors and commercial developers. Headquartered in New York City,
Atlantic has offices in Long Island City, NY; New Jersey; Pennsylvania; Illinois
and Georgia. It provides over 5,000 types of door locks, door closers, hinges,
and other types of door-related hardware, plus wood and hollow metal doors and
frames for new building construction, building renovation, interior tenant
build-outs and building maintenance. Atlantic's products are not sold into
wholesale or retail markets. Its customers are primarily building contractors,
construction managers, building owners and developers of commercial properties.
On March 24, 2000, Atlantic acquired BRS Products, Inc. ("BRS") (name changed to
Well-Bilt Steel Products, Inc.) ("Well-Bilt") by funding the Chapter 11
reorganization of that company. BRS is a manufacturer of hollow metal,
commercial and security detention (prison) doors. The acquisition allowed
Atlantic to diversify into the manufacturing of doors, with an emphasis on
security detention doors as a complement to its distribution operations.
Universal Supply Group, Inc. ("Universal") (100% owned by Colonial), is a 60+
year-old company, which distributes climate control systems and heating and air
conditioning equipment to heating, ventilation and air conditioning (HVAC)
contractors which, in turn, sell such products to residential and
commercial/industrial customers. Headquartered in Hawthorne, New Jersey,
Universal operates out of seven locations in New Jersey and two locations in New
York. In addition to its approximately 500 different products, Universal also
provides control system design, custom control panel fabrication, technical
field support, in-house training, and climate control consultation for engineers
and installers.
Colonial is headquartered in Levittown, New York, and its common and preferred
shares trade on the NASDAQ stock market under the symbols, "CCOM" and "CCOMP",
respectively.
<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 1999 and 1998. 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
1999
<S> <C> <C> <C> <C>
First Quarter $ 4 1/4 2 1/4 4 2 1/4
Second Quarter 4 3 1/16 4 3
Third Quarter 4 7/32 2 3/4 4 1/16 2 7/8
Fourth Quarter 3 9/16 2 3/4 3 1/2 2 7/8
1998
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 3 3/8 2 1/16
Fourth Quarter 2 15/16 2 3/32 2 7/8 2 3/32
<FN>
(b) Approximate number of common and convertible preferred stockholders
</FN>
</TABLE>
Approximate Number of
Record Holders
Title of Class (as of March 24 , 2000)
- -------------- ----------------------
Common stock par value $.05 per share 811
Convertible preferred stock par value $.05 per share 6,997
(c ) Dividends
The Company does not contemplate common stock dividend payments in the
near future.
<PAGE>
Management's Discussion And Analysis Of Financial Condition And Results Of
- --------------------------------------------------------------------------
Operations
- ----------
Results of Operations 1999-1998
- -------------------------------
The Company reported net income of $907,037 for the year ended December 31,
1999, which included $1,227,005 of net income from Atlantic and $515,128 of net
income from Universal, as compared with net income of $3,851,753 for the year
ended December 31, 1998, which included $1,291,552 of net income from Atlantic
and a $2,101,853 gain on sale of available-for-sale securities and a $826,797
gain on land sale. Universal was acquired effective July 1, 1999.
Sales increased $17,025,045 (67%) to $42,258,954, principally due to sales from
Universal ($16,592,423), which was acquired effective June 30, 1999 and
increased sales at Atlantic of $432,622 (1.7%), due to continued strength in
construction activity in Atlantic's markets, particularly in the New York
metropolitan area. Selling, general and administrative expenses, net increased
$4,300,742, principally due to $3,743,318 of expenses relating to Universal,
variable costs associated with increased sales at Atlantic and costs related to
the relocation of Atlantic's headquarters. Atlantic's selling and administrative
expense, as a percentage of sales, increased approximately 2 percentage points.
Interest expense increased $315,603, principally due to increased borrowings
related to the Universal acquisition and borrowings required to provide BRS
debtor-in-possession financing. Interest income decreased $8,292 due to lower
average invested cash resulting from the Company's investment in Universal.
Other income increased $38,384 largely due to service fees generated by
Universal's credit card program and accounts receivable credit programs. During
the 1999 year, the Company provided for federal and state taxes at an effective
tax rate of 42.9%, whereas during the 1998 year, the Company provided for
current state income taxes associated with the income from Atlantic, as well as
deferred tax expense resulting from the realized gain on the sale of the
Company's holdings of the common stock of Monroc, Inc., net of a deferred tax
benefit of $500,000, as a result of reducing the valuation allowance on deferred
tax assets at December 31, 1998.
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 the Company's three operating
subsidiaries and the timing and size of any acquisitions.
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 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.
<PAGE>
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% n 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.
Impact of Changing Prices
- -------------------------
The Company was not materially affected by changing prices in 1999.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1999, the Company had $1,759,954 in cash and cash equivalents
compared with $5,001,881 at December 31, 1998.
Cash flow provided by (used in) operations during the 1999 year improved in
comparison to the 1998 year from ($539,636) to $737,432 primarily due to
improved operating income.
Cash flows used in investing activities during the 1999 year of $6,275,461 were
primarily due to $3,879,427, net of cash acquired, used for the acquisition of
Universal, $1,069,213 for additions to property and equipment, principally
leasehold improvements, to Atlantic's new headquarters and the relocation of one
of Universal's facilities and $1,101,251 of debtor-in-possession financing
provided to BRS prior to it being acquired on March 24, 2000.
Cash flows provided by financing activities during the 1999 year of $2,296,102
were from net borrowings on the credit facility credit.
In June 1999, the Company entered into a loan and security agreement with a
financial institution related to a $16,000,000 credit facility. Borrowings under
the credit facility may be in the form of borrowings under a line of credit or
term loans and bear interest at the prime rate or at the Company's option, 250
basis points over the applicable LIBOR rate. At December 31, 1999, all amounts
outstanding under the facility bore interest at the prime rate or 8.5%. The
credit facility allows the Company to borrow against eligible accounts
receivable and inventory on a formula basis and up to $3,000,000 on five-year
term loans. Borrowings under the facility are secured by accounts receivable,
inventory, and fixtures and equipment. Monthly interest and principal payments
on the line of credit are based upon monthly accounts receivable collections, as
defined. The loan and security agreement is in effect until June 24, 2002,
unless demand for payment is made by the financial institution, and is
automatically renewed from year-to-year thereafter. The loan and security
agreement contains a number of covenants relating to the financial condition of
the Company and its business operations. The Company borrowed $6,500,000 to
finance the acquisition and refinance assumed debt of Universal.
At December 31, 1999, amounts outstanding under the credit facility were
$11,778,995, of which $2,750,000 represents amounts under a term loan, payable
in 60 equal monthly installments of $50,000. As monthly repayments are made on
the term loan, the available line of credit portion of the facility increases by
the amount of principal payment. At December 31, 1999, the amount of unused
available credit was $4,221,005.
During 1999, Atlantic guaranteed payment of certain accounts receivable of BRS
Products, Inc. ("BRS") to its factor. BRS, a supplier to Atlantic, is a
manufacturer of hollow metal doors and frames
<PAGE>
located in Hoboken, New Jersey. As of December 31, 1999, there was $64,259 of
BRS' accounts receivable outstanding guaranteed by Atlantic.
On October 28, 1999 BRS filed a petition for Chapter 11 bankruptcy. Atlantic
agreed to provide debtor-in-possession financing to BRS in the form of a
$1,050,000 revolving line of credit on eligible accounts receivable and a
$320,000 term loan. The financing agreement was secured by a super priority lien
on all of BRS's post-petition assets and a secured lien on all of its
pre-petition assets. As of December 31, 1999, there was $801,251 outstanding on
the revolving line of credit and $300,000 outstanding on the term loan.
The acquisition of BRS became effective on March 24, 2000 and the Company made
its $800,000 capital investment in BRS and funded BRS' unsecured creditors'
trust with $105,000, as required by the plan of reorganization confirmed by the
bankruptcy court on February 8, 2000. In addition, the Company has also agreed
to pay the administrative fees incurred by BRS, in conjunction with the
bankruptcy proceeding, which approximated $160,000. The Company intends to
finance BRS's operations by utilizing its existing credit facility and
additional capital investments of approximately $1,000,000 over the next two
years, $400,000 of which is required by the plan of reorganization.
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
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 1999, payments on the note have
been received in accordance with its terms. The note was prepaid in full,
including interest, subsequent to December 31, 1999.
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 $16,000,000 credit facility is in effect until June 24, 2002, unless
demand for payment is made by the financial institution, and will be
automatically renewed from year-to-year thereafter. The Company's resources
consist primarily of cash and cash equivalents and investments in Atlantic,
Universal and Well-Bilt.
Recent Accounting Pronouncements
- --------------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998. SFAS 137
defers the effective date of SFAS 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. Earlier application is permitted. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management of the Company does not believe that
implementation of SFAS 133 will have a significant impact on its financial
position and results of operations.
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", "intends" and similar
expressions are intended to be among the statements that identify
forward-looking statements. From time to time, the Company may also publish
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. Forward-looking
statements involve risks and uncertainties, including, but not limited to, the
consummation of certain events referred to in this report, technological
changes, competitive factors, maintaining customer and vendor relationships,
inventory obsolescence and availability, and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission, which
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements.
<PAGE>
COLONIAL COMMERCIAL CORP.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/S/ KPMG LLP
------------
Melville, New York
March 27,2000
<PAGE>
Item 1. Financial Statements
PART 1.
<TABLE>
<CAPTION>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets
1999 1998
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,759,954 5,001,881
Accounts receivable, net of allowance for doubtful accounts
of $828,000 in 1999 and $667,500 in 1998, respectively 11,961,043 8,571,701
Inventory 8,126,981 1,177,907
Note receivable - current portion 316,069 158,035
Advances to BRS Products, Inc. (note 2(c)) 1,101,251 --
Prepaid expenses and other assets 755,267 97,408
Deferred taxes 498,000 165,000
----------
----------
Total current assets 24,518,565 15,171,932
Note receivable, excluding current portion -- 316,069
Deferred taxes 3,192,002 335,000
Property and equipment, net 1,502,028 502,312
Excess of cost over fair value of net assets acquired and other
intangibles, net 365,482 --
----------- ----------
$29,578,077 16,325,313
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,803,946 1,090,135
Accrued liabilities 2,111,311 1,392,034
Income taxes payable 40,393 203,640
Borrowings under credit facility 11,778,995 2,049,268
Notes payable - current portion 158,335 18,677
----------
----------
Total current liabilities 16,892,980 4,753,754
Notes payable, excluding current portion 345,166 39,858
Excess of acquired net assets over cost, net 611,679 724,611
----------
----------
----------
Total liabilities 17,849,825 5,518,223
----------- ----------
Stockholders' equity:
Convertible preferred stock, $.05 par value, liquidation preference of
$7,664,915 and $7,964,970 at December 31, 1999 and 1998, respectively,
2,468,860 shares authorized, 1,532,983 and 1,592,994 shares issued and
outstanding at December 31, 1999 and 1998, respectively 76,649 79,650
Common stock, $.05 par value, 20,000,000 shares
authorized, 1,523,063 and 1,463,052 shares issued and
outstanding at December 31, 1999 and 1998, respectively 76,154 73,153
Additional paid-in capital 8,936,114 8,921,989
Retained earnings 2,639,335 1,732,298
----------
----------
Total stockholders' equity 11,728,252 10,807,090
----------- ----------
Commitments and contingencies
$29,578,077 16,325,313
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $ 42,258,954 25,233,909 22,642,783
Cost of sales 30,409,201 18,557,769 16,804,980
------------ ----------- -----------
Gross profit 11,849,753 6,676,140 5,837,803
Selling, general and administrative expenses, net 10,070,249 5,769,507 5,451,864
Write-off of deferred expenses for abandoned acquisition -- -- 385,705
------------ ----------- -----------
Operating income 1,779,504 906,633 234
Gain on sale of Monroc, Inc. stock -- 2,101,853 238,033
Gain on land sale -- 826,797 196,066
Interest income 172,914 181,206 191,473
Other income 153,283 114,899 178,231
Interest expense (515,886) (200,283) (287,381)
------------ ----------- -----------
Income before income taxes 1,589,815 3,931,105 516,656
Income taxes (benefit) 682,778 79,352 (155,700)
------------ ----------- -----------
Net income $ 907,037 3,851,753 672,356
============ =========== ===========
Net income per common share:
Basic $ 0.60 2.66 0.47
============ =========== ===========
Diluted $ 0.29 1.23 0.21
============ =========== ===========
Weighted average shares outstanding:
Basic 1,504,356 1,446,354 1,418,719
Diluted 3,136,017 3,134,617 3,164,840
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
Convertible Additional Retained Other
Preferred Common Paid-In Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income Equity
----- ----- ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 adjustment 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 adjustment for gains
realized in net income -- -- -- -- (2,101,853) --
Comprehensive income -- -- -- -- -- 1,961,763
Conversion of 56,387 shares of
preferred stock to common stock (2,819) 2,819 -- -- -- --
Acquisition and retirement 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
Net income
(comprehensive income) -- -- -- 907,037 -- 907,037
Conversion of 60,011 shares of
preferred stock to common stock (3,001) 3,001 -- -- -- --
Options issued to legal counsel -- -- 14,125 -- -- 14,125
-------- ------- ---------- ---------- ---------- -----------
Balances at December 31, 1999 $ 76,649 76,154 8,936,114 2,639,335 -- 11,728,252
======== ======= ========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ---------- ----------
Reconciliation of net income to net cash provided by
(used in) operating activities:
<S> <C> <C> <C>
Net income $ 907,037 3,851,753 672,356
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Deferred tax expense (benefit) 509,998 (194,000) (306,000)
Gain on disposal of fixed assets -- -- (6,784)
Gain on sale of land -- (826,797) (196,066)
Gain on sale of Monroc, Inc. stock -- (2,101,853) (238,033)
Provision for allowance for doubtful accounts 308,229 223,000 270,000
Issuance of stock options 14,125 -- --
Depreciation 171,677 99,910 70,326
Amortization of intangibles 23,132 -- --
Amortization of excess of acquired net assets
over cost (112,932) (112,932) (112,932)
Write-off of deferred expenses for abandoned
acquisition -- -- 385,705
Changes in assets and liabilities, net of the effects
of acquisitions:
Accounts receivable 165,564 (890,348) 130,871
Inventory (347,702) (354,640) 882,480
Prepaid expenses and other assets (43,529) 16,837 (31,953)
Accounts payable (264,766) (658,416) (1,428,999)
Accrued liabilities (430,154) 316,816 (19,117)
Income taxes payable (163,247) 91,034 (24,394)
----------- ---------- ----------
Net cash provided by (used in) operating
activities 737,432 (539,636) 47,460
Cash flows from investing activities:
Payment for acquisition of Universal Supply Group,
Inc. net of cash acquired (3,879,427) -- --
Payment for acquisition of Ramsco, Inc. (224,063) -- --
Advances to BRS Products, Inc. (1,101,251) -- --
Proceeds from sale of land -- 1,001,023 345,979
Proceeds from sale of Monroc, Inc. stock -- 3,533,653 456,233
Payments received on notes receivable 158,034 456,785 487,861
Proceeds from disposal of fixed assets -- -- 19,457
Additions to property and equipment (1,069,213) (197,491) (300,728)
Purchase of treasury stock -- (103,741) --
Costs incurred with respect to planned acquisition (159,541) -- (385,705)
---------- ----------
Net cash provided by (used in) investing activities (6,275,461) 4,690,229 623,097
Cash flows from financing activities:
Net borrowings (repayments) under credit facility 2,429,727 59,160 (283,022)
Payment on notes payable (133,625) (448,858) (469,082)
----------- ---------- ----------
Net cash provided by (used in)
financing activities 2,296,102 (389,698) (752,104)
Increase (decrease) in cash and cash equivalents (3,241,927) 3,760,895 (81,547)
Cash and cash equivalents - beginning of period 5,001,881 1,240,986 1,322,533
---------- ---------- ----------
Cash and cash equivalents - end of period $ 1,759,954 5,001,881 1,240,986
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(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
products and services to building contractors and architectural firms.
The Company operates in two primary markets:
(1) Door hardware and doors. The Company 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.
(2) Heating, ventilation and air conditioning (HVAC). The Company is
a distributor of heating, ventilation, air conditioning equipment
and climate control systems. The Company's products are marketed
primarily to HVAC contractors, which, in turn, sell such products
to residential and commercial/industrial customers. The Company
also provides technical field support, in-house training and
climate control consultation for engineers and installers. The
Company's customers are located in the United States, primarily
in Southern New York and Northern New Jersey.
(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) Revenue Recognition
-------------------
Revenue is recognized when the earnings process is complete, generally upon
shipment of products or performance of services.
(d) Cash Equivalents
----------------
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, 1999 and 1998,
is approximately $1,000,000 and $3,706,000, respectively, of
certificates of deposit.
(e) 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.
(Continued)
<PAGE>
2
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(f) Note Receivable
---------------
Note receivable is recorded at cost, less an allowance for impairment, if
any.
(g) Investment in Monroc, Inc.
--------------------------
The Company classified its investment in Monroc, Inc., (Monroc) (note 4),
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.
(h) Property and Equipment
----------------------
Property plant and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the
assets as follows:
Computer hardware and software 3-5 years
Office and warehouse equipment 5 years
Furniture and fixtures 5 years
Automobiles 3-5 years
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset.
(i) Intangible Assets
-----------------
Intangible assets consist of non-competition agreements and the excess cost
over fair value of assets acquired for subsidiary companies. Excess
cost over fair value of net assets acquired is being amortized, on a
straight-line basis, over a period not exceeding twenty years. The
value of the non-compete agreements is amortized on a straight-line
basis over the term of each agreement, which ranges from 5 to 15
years.
Accumulated amortization at December 31, 1999 and amortization of excess
cost over fair value of net assets acquired and other intangibles in
1999 approximated $24,600.
The recoverability of the excess cost over fair value of net assets
acquired is assessed by determining whether the amortization over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. If such amounts are not fully
recoverable, impairment is indicated. The amount of impairment, if
any, is measured based on projected discounted future operating cash
flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of the excess cost over
fair value of net assets acquired will be impacted if estimated future
operating cash flows are not achieved.
(Continued)
<PAGE>
3
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(j) 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 for options issued to employees would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
(k) 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.
(l) 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 were adjusted
retroactively for the five-to-one reverse stock split and the increase
in authorized common stock (note 8).
(m) Net Earnings Per Common 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 into common stock.
(n) 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). Statement 121 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.
(Continued)
<PAGE>
4
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(o) 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.
(p) Use of Estimates
The preparation of the financial statements, in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of the contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(2) Business Acquisitions
(a) On June 25, 1999, effective June 30, 1999, the Company purchased all
the assets, subject to all of the liabilities of Universal Supply
Group, Inc. (Universal), for $10,867,848 in cash (including direct
acquisition expenses and net of cash acquired). During the quarter
ended September 30, 1999, an additional $70,929 was paid to the
previous owners of Universal, pursuant to the purchase agreement. Four
million dollars of the purchase price was paid from the Company's
funds and the balance was financed through an asset based loan secured
by the assets of Universal. The acquisition was accounted for under
the purchase method of accounting. The purchase price has been
preliminarily allocated to the net assets acquired, based upon their
estimated fair values at the date of acquisition, pending final
determination of certain acquired balances. Included in such
allocation was the recognition of a deferred tax asset of $3,700,000
as a result of the Company's revised projection of future taxable
income of the combined company. The excess of the cost over the fair
value of the net assets acquired has been adjusted for the
aforementioned additional $70,929 payment, as well as the reversal of
a $75,000 contingent liability during the quarter ended December 31,
1999. The adjusted excess cost over fair value of assets acquired
amounting to $6,947, is being amortized on a straight-line basis over
a twenty-year period. Other acquired intangibles consisted of three
non-competition agreements that amounted to $231,667. The results of
operations of Universal have been included in the Company's
consolidated statement of income commencing July 1, 1999.
In connection with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired $14,961,026
Cash paid and other accrued purchase
price of $309,350 10,938,777
-----------
Fair value of liabilities assumed $ 4,022,249
===========
(Continued)
<PAGE>
5
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Universal's primary business is the distribution of HVAC products that
are marketed to HVAC contractors, which, in turn, sell such products
to residential and commercial/industrial customers. In addition to its
approximately 500 different product lines, Universal also provides
technical field support, in-house training and climate control
consultation for engineers and installers. Universal is headquartered
in Hawthorne, New Jersey and has seven operating locations in New
Jersey and two in New York.
The following unaudited pro forma summary presents information as if
the acquisition had occurred at the beginning of each year. The pro
forma information contains adjustments for interest on acquisition
financing, reduction of interest income, amortization of the excess
cost over the fair value of net assets acquired and other intangibles
and tax expense. These pro forma results of operations have been
prepared for comparative purposes only and do not purport to be
indicative of the results of operations that actually would have
resulted had the acquisition occurred on the first day of the year
indicated, or that may result in the future.
(Unaudited)
For the year ended December 31,
1999 1998
---- ----
Sales $ 55,421,828 51,693,546
Net income 961,752 3,742,060
Net income per common share:
Basic .64 2.59
Diluted .31 1.19
Weighted average shares outstanding:
Basic 1,504,356 1,446,354
Diluted 3,136,017 3,134,617
(b) On October 15, 1999, the Company purchased all of the accounts
receivable, inventory, fixed assets, trade names and customer lists of
Ramsco, Inc. for approximately $225,000 in cash. The transaction was
accounted for as a purchase and, accordingly, the cost of the
acquisition was allocated to the assets acquired, based upon their
estimated fair values. The excess of cost over the fair value of
assets amounted to approximately $150,000 and will be amortized over a
fifteen-year period. Pro forma results of operations were not provided
as their effects on the consolidated results of operations would not
have been material.
(c) On March 24, 2000, the Company acquired BRS Products, Inc. (BRS), a
company in bankruptcy. BRS is a manufacturer of hollow metal doors and
frames and was a supplier to the Company. The acquisition will be
accounted for under the purchase method of accounting. The Company is
still in the process of assessing the fair value of the assets and
liabilities acquired. Preliminary estimates indicate that the net
liabilities of BRS will range between $800,000 and $1,200,000. On
February 8, 2000, the bankruptcy court confirmed BRS's plan of
reorganization. In accordance with the plan of reorganization, the
Company agreed to make minimum capital contributions to BRS in the
amount of $800,000 on the effective date of the acquisition and
$400,000 on the first annual anniversary of such effective date.
Subsequent to December 31,1999, the Company made $800,000 of the
required capital contributions.
(Continued)
<PAGE>
6
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Prior to the filing of a petition for Chapter 11 on October 28, 1999,
the Company guaranteed payment of certain accounts receivable of BRS
to BRS's factor. In addition, during 1999, the Company agreed to
provide debtor-in-possession financing to BRS in the form of a
$750,000 line of credit on eligible accounts receivable, which was
later increased to $1,050,000, and a $320,000 term loan. As of
December 31, 1999, the amount outstanding under the line of credit is
$801,251 and the amount outstanding on the term loan is $300,000. Such
amounts are reflected as advances to BRS Products, Inc. on the
accompanying consolidated balance sheet as of December 31, 1999. These
advances increased to $1,528,194 by March 24, 2000. The Company also
agreed to pay the administrative fees incurred by BRS in conjunction
with the bankruptcy proceedings, which approximated $160,000. It is
anticipated that such amounts will be paid in April 2000.
As of December 31, 1999, the Company had approximately $158,034 of
direct costs in connection with the BRS acquisition. Such amounts have
been deferred and included in prepaid expenses and other assets on the
accompanying consolidated balance sheet as of December 31, 1999.
(d) The acquisition of Atlantic in 1995 resulted in an excess of fair
value of net assets acquired over the cost of $1,129,284, which is
amortized on a straight-line basis over a ten-year period.
(3) Note Receivable
---------------
In December 1997, the outstanding balance of a note in the amount 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 $70,017 beginning in June
1998. Amounts outstanding on the note at December 31, 1999 and 1998
were $316,069 and $474,104, respectively. The note was prepaid in
full, including interest, subsequent to December 31, 1999.
(4) 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. 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.
(5) Property and Equipment
----------------------
Property and equipment consist of the following at December 31:
1999 1998
---- ----
Computer hardware and software $ 817,332 551,807
Office and warehouse equipment 99,855 42,380
Furniture and fixtures 172,220 37,109
Leasehold improvements 675,163 --
Automobiles 152,924 114,805
------------- ---------
1,917,494 746,101
Less accumulated depreciation
and amortization 415,466 243,789
------------- ---------
$ 1,502,028 502,312
============= =========
(Continued)
<PAGE>
7
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Computer software includes approximately $427,972 and $296,287 of costs as of
December 31, 1999 and 1998, 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.
(6) Financing Arrangements
----------------------
In June 1999, the Company entered into a loan and security agreement with a
financial institution related to a $16,000,000 credit facility. Borrowings
under the credit facility may be in the form of borrowings under a line of
credit or term loans and bear interest at the prime rate or at the
Company's option, 250 basis points over the applicable LIBOR rate. At
December 31, 1999, all amounts outstanding under the facility bore interest
at the prime rate (8.5%). The credit facility allows the Company to borrow
against eligible accounts receivable and inventory on a formula basis and
up to $3,000,000 in the form of five-year term loans. Borrowings under the
facility are secured by accounts receivable, inventory, and fixtures and
equipment. Monthly interest and principal payments on the line of credit
are based upon monthly accounts receivable collections, as defined. The
loan and security agreement is in effect until June 24, 2002 and is
automatically renewed from year-to-year thereafter. Borrowings under the
credit facility are due on demand and, accordingly, have been classified as
short-term in the accompanying balance sheet. The loan and security
agreement contains a number of covenants relating to the financial
condition of the Company and its business operations.
At December 31, 1999, amounts outstanding under the credit facility were
$11,778,995, of which $2,750,000 represents amounts under a term loan,
payable in 60 equal monthly installments of $50,000. As monthly repayments
are made on the term loan, the available line of credit portion of the
facility increases by the amount of principal repayment. At December 31,
1999, the amount of unused available credit was $4,221,005. At December 31,
1998, the Company had $2,049,268 outstanding under a $3,500,000 line of
credit with another financial institution. The weighted average interest
rates for 1999, 1998 and 1997 were 8.25%, 10.0% and 10.4%, respectively.
(7) Notes Payable
-------------
(a) Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Term note payable to a former owner of acquired business in 60
monthly principal and interest installments of $9,125,
bearing interest at 8.0% 319,435 --
Term note payable to a former owner of acquired business in 60
monthly principal and interest installments of $4,790,
bearing interest at 7.0% 123,389 --
Term note payable to a bank in 36 monthly principal
and interest installments of $1,863, bearing interest at 7.36% 39,878 58,535
Term note payable to a bank in 60 monthly principal and
interest installments of $347, bearing interest at .9% 20,799 --
--------- --------
503,501 58,535
Less current installments 158,335 18,677
--------- ---------
$ 345,166 39,856
========= =========
</TABLE>
(Continued)
<PAGE>
8
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Maturities of notes payable are as follows:
2000 $ 158,335
2001 174,769
2002 124,182
2003 42,055
2004 4,160
-------------
503,501
Less current installments 158,335
-------------
$ 345,166
=============
(b) Included in accrued liabilities at December 31, 1999 and 1998 is
approximately $375,910 and $474,656, respectively, of unclaimed
payments on notes payable to creditors, pursuant to a 1983
reorganization plan. The last payment on such notes was made in
January 1998. In 1999, 1998 and 1997; $97,630, $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.
(8) 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.
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, 1999 there were 2,732,983 shares of common stock reserved for
conversion of preferred stock and for the exercise of stock options (note
9).
(Continued)
<PAGE>
9
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
(9) 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, 1999,
a total of 208,500 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 become exercisable is
determined by the Board of Directors at the time of grant. The exercise
price of the incentive stock options may not be less than the fair market
value of the Company's common stock on the date of grant. The exercise
price of the nonqualified stock options may not be less than 85% of the
fair market value of the Company's common stock on the date of grant.
In April 1999, options to purchase 129,500 shares of common stock were granted
to certain employees at $3.50 per share, which equaled the fair market
value of the shares at the date of the grant. The options were immediately
exercisable and expire in April 2009. In June 1999, pursuant to the 1996
plan, options to purchase 54,000 shares of common stock were granted to
certain employees at $3.75 per share, which equaled the fair market value
of the shares at the date of the grant. The options vest over a five-year
period and expire in June 2009. In June 1999, pursuant to the 1996 plan,
nonqualified options to purchase 5000 shares of common stock were granted
to outside legal counsel of the Company at $3.21 per share. Accordingly,
the Company recognized approximately $14,000 in professional fee expense,
which represents an estimate of the fair value of the options issued, in
the accompanying 1999 consolidated statement of income. The options were
immediately exercisable and expire in June 2009.
In April 1998, pursuant to the 1996 plan, options to purchase 2,000 shares of
common stock were granted to certain employees at $2.50 per share, which
equaled the fair market value of the shares at the date of the grant under
the 1996 Plan. The options were immediately exercisable and expire in March
2008.
In February 1997, pursuant to the 1996 plan, options to purchase 20,000 shares
of common stock were granted to certain employees at $2.50 per share, which
equaled the fair market value of the shares at the date of the grant under
the 1996 Plan. The options were immediately exercisable and expire in
February 2007.
(Continued)
<PAGE>
10
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Changes in options outstanding are as follows:
Shares Subject Weighted Average
to Option Exercise Price
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
Granted 188,500 3.56
------- -------
Balance at December 31, 1999 345,000 $ 2.66
======= =======
Options exercisable at
December 31, 1999 291,000 $ 2.46
======= =======
At December 31, 1999 and 1998, the range of exercise prices of outstanding
options was $1.25-$3.75 per share. At December 31, 1999 and 1998, the
weighted average remaining contractual lives of outstanding options were
approximately seven and five years, respectively.
The per share weighted average fair value of stock options granted during 1999,
1998 and 1997 was $3.28, $2.37 and $2.13, respectively, on the date of
grant using the Black Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Risk-free
Date of Expected Expected Interest Dividend
Grant Volatility Life (Years) Rate (%) Yield (%)
------ ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
1999 4/1/99 112% 10 5.27% 0%
6/9/99 88% 10 5.87% 0%
6/25/99 87% 10 6.02% 0%
1998 4/9/98 114% 10 5.70% 0%
1997 2/13/97 80% 10 6.30% 0%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for options issued to
employees, 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 Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation ," the
Company's net income and net income per share would have been reduced to
the pro forma amounts indicated below:
(Continued)
<PAGE>
11
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Net income:
<S> <C> <C> <C>
As reported $ 907,037 3,851,753 672,356
Pro forma 645,262 3,847,017 629,730
Net income per common share (basic):
As reported .60 2.66 .47
Pro forma .43 2.66 .44
Net income per common share (diluted):
As reported .29 1.23 .21
Pro forma .21 1.23 .20
</TABLE>
The following table summarizes information about stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Options Exercisable
Weighted- Weighted- Weighted-
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Shares Contractual life Price Shares Price
--------------- ------ ---------------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.25 51,000 3.05 $1.25 51,000 $1.25
$1.26-$2.50 105,500 3.91 1.73 105,500 1.73
$2.50-$3.75 188,500 9.32 3.56 134,500 3.49
------- -------
Total 345,000 6.74 2.66 291,000 2.46
======= =========== ========= ======= =========
</TABLE>
(Continued)
<PAGE>
12
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Net Income Per Common Share
---------------------------
A reconciliation between the numerators and denominators of the basic and
diluted income per common share is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (numerator) $ 907,037 3,851,753 672,356
========== ========= =========
Weighted average common shares
(denominator for basic income
per share) 1,504,356 1,446,354 1,418,719
Effect of dilutive securities:
Convertible preferred stock 1,551,690 1,631,547 1,678,559
Employee stock options 79,971 56,716 67,562
---------- --------- ---------
Weighted average common and
potential common shares
outstanding (denominator for
diluted income per share) 3,136,017 3,134,617 3,164,840
========== ========= =========
Basic income per share $ .60 2.66 .47
========== ========= =========
Diluted income per share .29 1.23 .21
========== ========= =========
</TABLE>
Employee stock options of 54,000, 183,500 and 188,500 for the second, third and
fourth quarters, respectively, of 1999, were not included in the net income
per share calculation because their effect would have been anti-dilutive.
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.
(11) Income Taxes
------------
The provision (benefit) for income taxes attributable to income is comprised of:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
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 $ 2,313 170,467 172,780 70,930 202,422 273,352 2,000 148,300 150,300
Deferred 509,998 -- 509,998 (194,000) -- (194,000) (306,000) -- (306,000)
-------- ------- -------- -------- ------- -------- -------- -------- --------
$512,311 170,467 682,778 (123,070) 202,422 79,352 (304,000) 148,300 (155,700)
======== ======= ======== ======== ======= ======== ======== ======== ========
</TABLE>
Income tax expense for 1999, 1998 and 1997 differed from amounts computed by
applying the U.S. Federal income tax rate of 34% to pre-tax income due to
various items including permanent differences, alternative minimum taxes,
state and local taxes, net of Federal income tax benefit and a net
reduction (increase) in the valuation allowance for deferred tax assets of
($342,627), $644,547 and $1,288,667 for 1999, 1998 and 1997, respectively.
Additionally, in the fourth quarter of 1999, the Company reversed $76,972
of prior years' over accruals of state and local taxes that are no longer
required.
(Continued)
<PAGE>
13
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ----------
<S> <C> <C> <C>
Deferred tax expense, exclusive of the effect
of the other components listed below $ 167,371 450,547 492,253
Adjustment to deferred tax assets for expired
net operating loss carryforwards -- -- 490,414
Decrease in beginning-of-the-year balance of
the valuation allowance for deferred tax
assets 342,627 (644,547) (1,288,667)
--------- -------- ----------
$ 509,998 (194,000) (306,000)
========= ======== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1999 and 1998 are
presented below.
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 10,622,357 $ 10,884,818
Accounts receivable due to allowance
for doubtful accounts 276,901 286,204
Inventory due to valuation reserve 177,184 216,047
Additional costs inventoried for tax purposes 140,943 --
Alternative minimum tax credit carryforward 118,198 115,885
Other 11,286 11,286
------------ ------------
Total gross deferred tax assets 11,346,869 11,514,240
Less valuation allowance (7,656,867) (11,014,240)
------------ ------------
Deferred tax assets, net $ 3,690,002 $ 500,000
============ ============
At December 31, 1999, 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 in 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, 1999.
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 $10,850,000. Taxable income for 1999, 1998 and 1997 was
approximately $1,507,000, $4,050,000 and $491,000, respectively.
During 1999, the valuation allowance was reduced by $3,700,000 in connection
with the purchase of Universal (note 2 (a)). 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.
(Continued)
<PAGE>
14
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $31,200,000. Varying amounts
of the net operating loss carryforwards will expire each year from 2000
through 2008. Approximately $2,300,000 of the net operating loss
carryforwards will expire if not utilized during 2000. During 1999, the
Company utilized approximately $1,507,000 of its net operating loss
carryforwards and none expired. The net operating loss carryforwards have
been substantially reduced as a result of certain annual limita- tions 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.
(12) 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.
(13) Supplemental Cash Flow Information
----------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
1999 1998 1997
---- ---- ----
Cash paid during the years for:
Interest $522,711 208,824 286,340
======= ======= =======
Income taxes $347,284 186,386 181,428
======= ======= =======
Non-cash transactions:
During 1999, the Company financed $6,750,000 of debt incurred in connection with
the acquisition of Universal (note 2(a)).
During 1999, 60,011 shares of convertible preferred stock were converted to a
similar number of common shares.
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 1998, the Company issued a $60,030 note payable to finance the purchase
of equipment (note 7).
(Continued)
<PAGE>
15
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Employee Benefit Plans
----------------------
The Company has a profit-sharing plan and 401(k) plan, which cover
substantially all employees of the Company's subsidiary, Atlantic Hardware
and Supply Corporation (Atlantic). The Company also has a 401(k) plan,
which covers substantially all employees of the Company's subsidiary,
Universal. Participants in the 401(k) plans may contribute a percentage of
compensation, but not in excess of the maximum allowed under the Internal
Revenue Code. The Atlantic 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 1999, 1998
and 1997, the Board of Directors authorized $90,000, $90,000 and $70,000,
respectively, of such discretionary contributions to the plans. The
Universal 401(k) plan does provide for matching contributions. In 1999,
$43,000 of matching contributions were made to the Universal 401(k) plan.
Universal has a deferred compensation plan, which covers certain employees.
Contributions equaling 5% of a participant's compensation is required to be
made to the plan for those participants who are employed as of December 31.
During 1999, approximately $26,000 of contributions were made to the
deferred compensation plan.
(15) Industry Segments
-----------------
The Company has three reportable segments: (1) door hardware and doors (2) HVAC
(effective July 1, 1999) and (3) investing activities. The door hardware
and doors segment generates revenue from the distribution of products to
the contract hardware market. The HVAC segment generates revenue from the
distribution of heating, ventilation and air conditioning equipment and
climate control systems. 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, except as set forth in the notes below.
The Company evaluates performance of the door hardware and doors segment
and the HVAC 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. 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 and doors segment and HVAC segment.
Summarized financial information for each of the Company's three business
segments for 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Door hardware Investing Unallocated Consolidated
1999 and doors HVAC activities amount Eliminations Total
- ----- ------------- ---- ---------- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 25,666,531 16,592,423 -- -- -- 42,258,954
Operating income 1,569,932(a) 898,726(a) (689,154)(a) -- -- 1,779,504
Other income 5,541 48,480 99,352 -- -- 153,283
Interest income -- -- 269,438 -- (96,524)(b) 172,914
Interest expense 274,350 338,060 -- -- (96,524)(b) 515,886
Income before
income taxes 1,301,033(a) 609,146(a) (320,364)(a) -- -- 1,589,815
Net income 1,227,005 515,128 (325,098) (509,998)(f) -- 907,037
Total assets 12,121,876 12,082,499 8,672,107 3,690,002(c) (6,988,407)(d) 29,578,077
Non-cash items:
Provision for
doubtful accounts 208,974 99,255 -- -- -- 308,229
Amortization of
negative goodwill 112,932 -- -- -- -- 112,932
Depreciation expense 142,410 29,267 -- -- -- 171,677
Amortization expense -- 23,132 -- -- -- 23,132
Capital expenditures 873,698 195,515 -- -- -- 1,069,213
========== =========== ========== ========== ========== ===========
</TABLE>
(Continued)
<PAGE>
16
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Door hardware Investing Unallocated Consolidated
1998 and doors 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
=========== ========= =========== =============== ==========
Door hardware Investing Unallocated Consolidated
1997 and doors activities amount Eliminations Total
- ----- --------- ---------- ------ ------------ -----
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) 16,160,457
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
=========== ========== =========== ========== ==========
<FN>
(a) Includes an allocation from the investing segment to the door hardware and
doors segment of $150,000, $120,000 and $90,000 in 1999, 1998, and 1997,
respectively, and $124,800 to the HVAC segment in 1999, based on
management's estimate of costs incurred by the investing segment on behalf
of the door hardware and doors segment and HVAC 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 expense (benefit) that is not
allocated to either segment.
(Continued)
</FN>
</TABLE>
<PAGE>
17
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Business and Credit Concentrations
----------------------------------
During 1998, five customers accounted for approximately 37% of the Company's
annual sales and during 1997, four customers accounted for approximately
27% of the Company's annual sales. At December 31, 1999 and 1998, six and
seven customers, respectively, had accounts receivable balances, which in
the aggregate, represented 17% and 43%, respectively, of the total net
receivable balance. During 1999, no customers exceeded 10% of the Company's
annual sales or accounts receivable. The Company estimates an allowance for
doubtful accounts based on the credit- worthiness 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.
Universal purchases products from approximately 500 suppliers. In 1999, two
suppliers accounted for 39.5% of Universal's purchases. The loss of one of
these suppliers could have a material adverse effect upon its business for
a short-term period. Universal believes that the loss of any one of its
other suppliers would not have a material adverse effect upon its business.
(17) Commitments
-----------
(a) Compensation
The Company has employment contracts with two officers and various
employees with remaining terms ranging from two to six years. The
Company's remaining aggregate commitment at December 31, 1999 is
approximately $4,896,500. Such amount includes a compensation
commitment for an officer reflected in an employment contract
effective January 1, 2000. The aggregate commitment does not include
amounts that may be earned as a bonus.
In January 2000, the Company's Board of Directors approved an incentive
compensation arrangement for an officer of the Company for fiscal
2000. The plan provides for incentive compensation to be paid equal to
1% of the first $6,000,000 increase in the Company's market
capitalization, as defined, and 2% of any excess over $6,000,000. The
incentive compensation is limited to the annual salary of the officer.
(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 $682,000, $275,000 and
$283,000 in 1999, 1998 and 1997, respectively. Rent expense in 1998
and 1997 is before sublease income of $55,264 and $46,020,
respectively. At December 31, 1999, future minimum lease payments in
the aggregate and for each of the five succeeding years are as
follows:
2000 $ 952,298
2001 834,324
2002 757,349
2003 750,251
2004 712,249
Thereafter 3,051,861
---------
Total $ 7,058,332
=========
<PAGE>
OFFICERS
Bernard Korn, Chairman of the Board/President
James W. Stewart, Executive Vice President/Treasurer/Secretary
SUBSIDIARIES
Atlantic Hardware and Supply Corporation
Paul Selden, President
Universal Supply Group, Inc.
William Pagano, President
Well-Bilt Steel Products, Inc.
Tom Porter, 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 7,2000,10:30 AM Levittown, New York 11756-1315
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
Universal Supply Group, Inc. 11-3391045
Well-Bilt Steel Products, Inc. 22-3408907
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
27, 2000, relating to the consolidated balance sheets of Colonial Commercial
Corp. and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report is
incorporated by reference in the December 31, 1999 annual report on Form
10-KSB of Colonial Commercial Corp.
Melville, New York
March 29, 2000
<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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,759,954
<SECURITIES> 0
<RECEIVABLES> 12,789,043
<ALLOWANCES> 828,000
<INVENTORY> 8,126,981
<CURRENT-ASSETS> 24,518,565
<PP&E> 1,912,957
<DEPRECIATION> 410,929
<TOTAL-ASSETS> 29,578,077
<CURRENT-LIABILITIES> 16,892,980
<BONDS> 0
76,154
0
<COMMON> 76,649
<OTHER-SE> 11,575,449
<TOTAL-LIABILITY-AND-EQUITY> 29,578,077
<SALES> 42,258,954
<TOTAL-REVENUES> 42,258,954
<CGS> 30,409,201
<TOTAL-COSTS> 30,409,201
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 308,229
<INTEREST-EXPENSE> 515,886
<INCOME-PRETAX> 1,589,815
<INCOME-TAX> 682,778
<INCOME-CONTINUING> 907,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 907,037
<EPS-BASIC> .60
<EPS-DILUTED> .29
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