SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K
 ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 For
      the Fiscal Year Ended December 31, 2004
    
    Commission
      File No. 1-6663
 
 COLONIAL
COMMERCIAL CORP.
 (Exact
Name of Registrant as Specified in its Charter)
 
 New
      York
    
    11-2037182(State
      or other jurisdiction of Incorporation or Organization)
    
    (I.R.S.
      Employer Identification No.)
 
 
 120
New South Road, Hicksville, New York  11801
 (Address
of Principal Executive Offices) (Zip Code)
 
 Registrant’s
Telephone Number, Including Area Code: 516-681-4647
 
 Securities
Registered Pursuant to Section 12(b) of the Act:
 
 Title
      of Class
    
    Name
      of Exchange on Which RegisteredNone
    
    NASD
      Bulletin Board
 
 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 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 o
 
 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 or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
 
 Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).
 
 Yes oNo x
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on June 30, 2004 was $3,047,739.
 
 
 The
number of shares outstanding of Registrant’s Common Stock and Convertible
Preferred Stock as of April 7, 2005:
 
 OutstandingCommon
      Stock $.05 par value
    
    
    4,172,520Convertible
      Preferred Stock $.05 par value
    
    
    790,360
 
 Documents
Incorporated by Reference
 
 See Index
to Exhibits
  
  PART
I.
 Forward-looking
Statements
 
 This
Report on Form 10-K contains forward-looking statements relating to such matters
as anticipated financial performance and business prospects. When used in this
Report, the words “anticipates,” “expects,” “believes,” “may,” “intends” and
similar expressions are intended to be among the statements that identify
forward-looking statements. From time to time, the Company may also publish
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. Forward-looking
statements involve risks and uncertainties, including, but not limited to, the
consummation of certain events referred to in this report, the availability of
financing, 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.
 
 Item
      1.
    Business
 
 (a)
    The
      Company
 
 Colonial
Commercial Corp. (“Colonial”) is a New York corporation, which was incorporated
on October 28, 1964. Unless otherwise indicated, the term “Company” refers to
Colonial Commercial Corp. and its consolidated Subsidiaries. The Company’s
operations are conducted through its wholly owned Subsidiaries, Universal Supply
Group, Inc., (“Universal”), The RAL Supply Group, Inc. (“RAL”) and American
Universal Supply, Inc. (“American”). The business operations of the Company are
described below under “Narrative Description of Business.”
 
 (b)
    General
      Business Developments
 
 During
2004, we raised a total of $1,635,000 in equity and non-debt financing in
several private placements described under the section below entitled, Item 7
“Liquidity and Capital Resources-Equity Transactions.” Of these funds, $355,639
was used to purchase and retire 592,730 shares of escheated convertible
preferred stock at $0.60 per share, and the balance was used for working
capital. We also completed a $15,000,000 secured loan facility described under
the section below entitled, Item 7 “Liquidity and Capital Resources-Credit
Facility.”
 
 In
November, Universal opened a new location in Deptford, New Jersey. This location
services the needs of our customers in central and southern New Jersey as well
as in portions of eastern Pennsylvania. On May 28, 2004, Universal closed its
Rochelle Park location.
 
 (c)
    Financial
      Information About Industry Segments
 
 We have
one continuing industry segment - wholesale distribution of heating,
ventilation, air conditioning equipment and high-end plumbing fixtures.
 
 (d)
    Narrative
      Description of Business
 
 Heating,
Ventilation And Air Conditioning
  
  General
 
 Through
our three Subsidiaries, Universal, RAL and American, we distribute heating,
ventilating and air conditioning equipment (HVAC), parts and accessories,
climate control systems, and high-end plumbing supplies, primarily, in the New
York metropolitan area.
 
 Universal
is the exclusive supplier of the Amana air conditioning and heating equipment
line in New Jersey (exclusive of Cape May and Cumberland counties) and lower
portions of New York State. It is also the non-exclusive supplier of the Goodman
line of heating and air conditioning equipment in substantially the same trading
area.
 
 Universal
distributes its products through seven locations in New Jersey, one location in
New Hampton, New York, and an additional location in Willow Grove, Pennsylvania.
Universal, through its energy management division, known as Universal Energy
Products (“UEP”), specializes in the design and sale of energy conservation
control systems and the fabrication of customized UL listed control panels.
Universal also supplies indoor air quality components and systems.
 
 American,
through its locations in Elmsford and Hicksville, New York, distributes the
American Standard line of heating, ventilating and air conditioning equipment,
and related accessories in the lower portions of New York State, the five
boroughs of Manhattan and Long Island, New York.
 
 RAL
distributes high-end plumbing fixtures through four showrooms located in
Fishkill, Middletown, New Windsor and Suffern, New York. It also distributes
heating, ventilating, and air conditioning supplies to contractors through these
locations as well as through two additional locations in Poughkeepsie and
Peekskill, New York.
 
 We
estimate that 85% of our sales are for replacement and/or renovation, and that
the remaining 15% of sales are for new construction projects. We also estimate
that 80% of our sales are for the residential market, and that the 20% balance
of our sales are for the commercial market. The Company’s sales are comprised of
approximately 42% HVAC equipment, 38% parts and accessories, 15% climate control
systems, and 5% high end plumbing supplies.
 
 Our
in-house staff provides technical assistance and training to customers. In some
cases, we also use vendors’ representatives and outside services.
 
 Distribution
 
 We stock
inventory in most of our 17 locations. We deliver products to customers with our
fleet of 15 leased and 11 owned trucks and vans. We also make products available
for pick-up at our facilities.
 
 Customers
 
 We sell
primarily to contractors serving the residential and commercial heating,
ventilating, and air conditioning industry. These contractors purchase and
install equipment and systems for residential, commercial and industrial users.
We do not install any equipment or systems.
  
  We had
approximately 5,000 customers in 2004. No customer accounted for more than 2% of
consolidated net sales in 2004. We believe that the loss of any one customer
would not have a material adverse effect on its business.
 
 We have
no long term agreement with any customer. We deal with our customers on a
purchase order by purchase order basis. We have no assured stability in our
customer base.
 
 Suppliers
 
 We have
no material long term agreements with any supplier. Certain of our supplier
agreements limit the sale of competitive products in designated markets that we
serve.
 
 In 2004,
two suppliers accounted for 38% of our purchases. The loss of one or both of
these suppliers could have a material adverse effect on our business for a
short-term period. We believe that the loss of any one of our other suppliers
would not have a material adverse effect on our business.
 
 Intellectual
Property
 
 We have
no patent, intellectual property rights or proprietary technology.
 
 Seasonality
 
 Our
business is affected by significant outdoor temperature swings. Our sales
typically increase during peak heating and cooling demand periods. Demand
related to the residential central air conditioning replacement market is
highest in the second and third quarters with demand for heating equipment
usually highest in the fourth quarter.
 
 Insurance
 
 We carry
general liability, comprehensive property damage, workers compensation and
product liability insurance in amounts that we consider adequate for our
business. We maintain $2,000,000 general liability coverage, plus a $10,000,000
umbrella policy.
 
 Competition
 
 We
operate in a highly competitive environment in our geographical region. We
compete with a number of distributors and also with several air conditioning and
heating equipment manufacturers that distribute a significant portion of their
products through their own distribution organizations. There is no single
manufacturer or distributor that dominates our market. Competition is based upon
product availability, customer service, price and quality. We work to maintain a
competitive edge by providing in-house training, technical sales support to our
customers and by employing experienced personnel at our point-of-sale
locations.
 
 Regulatory
Matters
 
 No
material regulatory requirements apply specifically to our
business.
 
 Employees
 
 As of
December 31, 2004, the Company had 141 non-union full-time employees. The
Company believes its employee relations are satisfactory.
  
  (e)
    Financial
      Information About Geographic Areas
 
 The
Company has no foreign operations and all sales, during the last three years,
are to customers located in the United States, primarily in New Jersey and New
York.
 
 Item
      2.
    Properties
 
 Our
principal executive offices are located at 120 New South Road, Hicksville, New
York 11801 in approximately 440 square feet of space.
 
 Universal
maintains an office and warehouse in Hawthorne, New Jersey and additional
warehouses in Bogota, Augusta, North Brunswick, Cedar Knolls, Wharton and
Deptford, New Jersey, New Hampton, New York, and Willow Grove, Pennsylvania,
occupying approximately 182,500 square feet under leases expiring from 2004 to
2014, subject to renewal options, at current aggregate annual rentals of
approximately $1,223,000.
 
 RAL
maintains showrooms and warehouses at Middletown, Fishkill, New Windsor,
Peekskill, Poughkeepsie and Suffern, New York, occupying approximately 81,000
square feet under leases expiring in 2008, subject to renewal options, at
current aggregate annual rentals of approximately $797,000.
 
 American
maintains showrooms and warehouses at Elmsford and Hicksville, New York,
occupying approximately 48,270 square feet under leases expiring in 2006 and
2012, respectively, at current aggregate annual rentals of approximately
$495,000.
 
 Our
premises are suitable and adequate for their intended use and are adequately
covered by insurance. As of December 31, 2004, we leased all our
facilities.
 
 Item
      3.
    Legal
      Proceedings
 
 On
January 28, 2002, Atlantic Hardware & Supply Corporation (“Atlantic”), a
wholly-owned Subsidiary of the Company, filed a voluntary petition with the U.
S. Bankruptcy Court for the Eastern District of New York to reorganize under
Chapter 11 of the U. S. Bankruptcy Code. The proceedings are still
on-going. Colonial Commercial Corp. and Universal are not part of the Chapter 11
filing. The Company does not believe that Atlantic will emerge from the
reorganization with any value for the Company. The Company does not exercise
significant influence over Atlantic’s operations and financial activities. As of
the year ended December 31, 2002, Atlantic has been deconsolidated on the
Company’s financial statements and its operations are being reported as “results
from operations of discontinued segments.”
 
 Universal
Supply Group, Inc. is a New York corporation (“Universal”). In June 1999,
Universal acquired substantially all of the assets of Universal Engineering Co.,
Inc. and Universal Supply Group, Inc., a New Jersey corporation, including its
name. The name of Universal Supply Group, Inc. (the selling corporation) was
subsequently changed to Hilco, Inc. In 1998, Hilco, Inc. acquired the assets of
Amber Supply Co., Inc., previously known as Amber Oil Burner Supply Co., Inc.,
Universal Engineering Co., Inc., Amber Supply Co., Inc., Amber Oil Burner Supply
Co., Inc. and Hilco, Inc. are referred to as the “Predecessors.” The majority
shareholders of the predecessors are John A. Hildebrandt and Paul Hildebrandt.
Paul Hildebrandt was a director of the Company from September 29, 2004 to
January 28, 2005.
  
  Universal
has been joined as a defendant with Predecessors and many other companies in
numerous product liability lawsuits brought in the Superior Court of New Jersey
(Middlesex County) that allege injury due to asbestos. These actions have been
managed by the Predecessor’s historic product liability insurance carriers, and
all claims, including all defense and settlement costs, to date have been
covered and paid by those carriers. Counsel representing the Company in these
matters has advised that they are not aware of any material pending or
threatened litigation, claims or assessments, except for one matter of which any
verdict or settlement will be covered by insurance. John A. Hildebrandt, Paul
Hildebrandt and the Predecessors have also indemnified Universal against all
asbestos claims. The asbestos claims that have been filed to date stem primarily
from products sold by the Predecessors prior to 1999 that were manufactured
and/or packaged by a third party, which allegedly contained asbestos. The
Company does not believe that it will be materially adversely affected by these
lawsuits.
 
 Item
      4.
    Submission
      of Matters to a Vote of Security
Holders
 
 The
Company held its Annual Meeting on September 29, 2004. The results of matters
voted at that Meeting were reported in Part II, Item 4 of the Company’s Form
10-Q for the period ended September 30, 2004.
 
 PART
II
  Item
      5
    Market
      for the Registrant’s Common Stock, Convertible Preferred Stock and Related
      Stockholder Matters
 (a)
    Price
      Range of Common Stock and Convertible Preferred
Stock
 
 From July
11, 2002 through March 30, 2004, the Company’s common stock was traded on the
Over the Counter (OTC) - Pink Sheets market. Commencing March 31, 2004, the
Company’s common stock and convertible preferred stock were traded on the Over
the Counter (OTC)-Bulletin Board market. The following table sets forth the
quarterly high and low bid prices during 2004 and 2003. The quotations set forth
below represent inter-dealer quotations, which exclude retail markups, markdowns
and commissions and do not necessarily reflect actual transactions.
 
 Common
      Stock
    
    Convertible
      Preferred Stock2004
    
    High
    
    Low
    
    High
    
    LowFirst
      Quarter
    
    $
    1.95
    
    $
    .50
    
    $
    1.05
    
    $
    .60Second
      Quarter
    
    
    1.85
    
    
    1.20
    
    
    1.50
    
    
    .95Third
      Quarter
    
    
    2.05
    
    
    1.16
    
    
    2.00
    
    
    1.20Fourth
      Quarter
    
    
    1.78
    
    
    1.35
    
    
    1.80
    
    
    1.302003First
      Quarter
    
    $
    .15
    
    $
    0
    
    
    Not
      Available
    
    
    Not
      AvailableSecond
      Quarter
    
    
    .15
    
    
    .10
    
    
    Not
      Available
    
    
    Not
      AvailableThird
      Quarter
    
    
    .98
    
    
    .50
    
    $
    .50
    
    $
    .35Fourth
      Quarter
    
    
    1.05
    
    
    .13
    
    
    .60
    
    
    .55
  
  (b)
    Approximate
      number of common and convertible preferred
stockholders:
 
 Title
      of Class
    
    Approximate
      Number ofRecord
      Holders(as
      of April 7, 2005)Common
      stock par value $.05 per share
    
    
    278Convertible
      preferred stock par value $.05 per share
    
    
    1062
 
 (c)
    Dividends
 
 The
Company does not contemplate common stock dividend payments in the near future
and is restricted from paying any dividends under its credit
facility.
 
 Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
 
 Period
    
    (a)
      Total Number of Shares (or Units) Purchased (1)
    
    (b)
      Average Price Paid per Share (or Unit)
    
    (c)
      Total Number of Shares (or Units) Purchased as Part of Publicly Announced
      Plans or Programs
    
    (d)
      Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May
      Be Purchased Under the Plans or ProgramsFebruary
      12, 2004
    
    
    592,730
    
    $
    0.60
    
    
    0
    
    
    0
 
 On
February 12, 2004, the Company completed a private placement, pursuant to
Regulation D of the Securities Exchange Act of 1933. The Company raised $360,000
through the issuance of 600,000 shares of common stock at $0.60 per share. The
Company used substantially all of the proceeds from the February 12, 2004
private placement to purchase 592,730 shares of escheated convertible preferred
stock at $0.60 per share from the State of Ohio. The Company retired these
convertible preferred shares.
 
 Item
      6.
    Selected
      Financial Data
 
 Years
      Ended December 31,2004
    
    2003
    
    2002
    
    2001
    
    2000Sales
    
    $
    61,454,128
    
    $
    44,671,136
    
    $
    36,998,800
    
    $
    31,080,398
    (1)
    $
    32,342,160
    (1)(2)Operating
      income
    
    
    1,717,812
    
    
    1,296,597
    
    
    226,567
    
    
    519,860
    
    
    (58,036
    )Income
      (loss) from continuing operations
    
    
    1,661,156
    
    
    1,320,263
    
    
    (106,310
    )
    
    (1,610,810
    )
    
    (1,323,627
    )Income
      (loss) from operations of discontinued segment
    
    
    -
    
    
    -
    
    
    3,300,695
    (3)
    
    (6,098,023
    )
    
    (2,977,916
    )Income
      (loss) on disposal of discontinued operation
    
    
    -
    
    
    -
    
    
    -
    
    
    106,509
    
    
    (3,731,654
    )Income
      (loss) on discontinued operation
    
    
    -
    
    
    -
    
    
    3,300,695
    
    
    (5,991,514
    )
    
    (6,709,570
    )Net
      income
    
    $
    1,661,156
    
    $
    1,320,263
    
    $
    3,194,385
    
    $
    (7,602,324
    )
    $
    (8,033,197
    )Income
      (loss) per common share:Basic:Continuing
      operations
    
    $
    .49
    
    $
    .67
    
    $
    (0.07
    )
    $
    (1.00
    )
    $
    (0.86
    )Income
      (loss) on discontinued operation
    
    $
    -
    
    $
    -
    
    $
    2.06
    
    $
    (3.74
    )
    $
    (4.35
    )Net
      income (loss) per common share
    
    $
    .49
    
    $
    .67
    
    $
    1.99
    
    $
    (4.74
    )
    $
    (5.21
    )Diluted:Continuing
      operations
    
    $
    .36
    
    $
    .38
    
    $
    (0.07
    )
    $
    (1.00
    )
    $
    (0.86
    )Income
      (loss) on discontinued operation
    
    $
    -
    
    $
    -
    
    $
    2.06
    
    $
    (3.74
    )
    $
    (4.35
    )Net
      income (loss) per common share
    
    $
    .36
    
    $
    .38
    
    $
    1.99
    
    $
    (4.74
    )
    $
    (5.21
    )
  
  December
      31,2004
    
    2003
    
    2002
    
    2001
    
    2000Total
      assets
    
    $
    24,515,258
    
    $
    20,618,987
    
    $
    13,686,842
    
    $
    13,925,490
    
    $
    26,550,994Current
      liabilitiesBorrowings
      under credit facility
    
    
    12,325,209
    (5)
    
    12,232,030
    (3)
    
    10,350,889
    (3)
    
    7,929,576
    
    
    9,096,294Other
    
    
    6,617,377
    
    
    7,089,276
    (4)
    
    3,953,063
    (4)
    
    9,659,183
    (4)
    
    12,876,360Long-term
      liabilities, less current Obligations
    
    
    1,398,774
    
    
    326,700
    
    
    64,775
    
    
    213,001
    
    
    852,286
 
 (1)
    Due
      to the discontinuance of operations in 2001, excludes sales from Atlantic
      which were $24,561,972 and$25,978,063
      in 2001 and 2000, respectively.
 (2)
    Due
      to the discontinuance of operations in 2000, excludes sales from
      Well-Bilt, which were $4,074,798, net of inter-company
    sales.
 (3)
    The
      amounts shown in the table as “Borrowings under Credit Facility,” as of
      December 31, 2003 and December 31, 2002, includes $2,500,000 which
      Colonial Commercial Corp. and Universal agreed to pay to their lending
      bank in consideration of the bank releasing Colonial Commercial Corp. and
      Universal from their guarantees to the bank of an additional $3,300,695 of
      Atlantic’s line of credit. The release from the $3,300,695 of the
      guarantee resulted in the recognition of income from discontinued
      operations in 2002. See “General Business
Developments.”
 (4)
    Amount
      includes $219,007 of contingent liabilities of Atlantic. This liability
      was settled in June 2004.
 (5)
    “Borrowings
      under credit facility” as of December 31, 2004 is based on a new lending
      agreement as of July 29, 2004. See “General Business Developments” for
      terms.
 
 Item
      7.
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 Critical
Accounting Policies
 
 The
accounting policies below are critical to the Company’s business operations and
the understanding of results of operations. The Company’s discussion and
analysis of its financial condition and results of operations are based upon the
Company’s consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities as the date of the consolidated
financial statements and the reported amount of revenue and expenses during the
reporting period. The Company bases its estimates on historical experience and
on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of asset and liabilities that are not readily apparent
from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
 
 Revenue
for the Company primarily consists of sales of heating, ventilation and air
conditioning equipment, climate control systems and high-end plumbing fixtures.
The Company recognizes revenue after it receives a purchase order with a fixed
determinable price from the customer and shipment of products has occurred in
accordance with the shipping terms. There are no further obligations on the part
of the Company subsequent to revenue recognition, except for returns of
defective products from the Company’s customers, which are covered under the
manufacturer’s warranty. Credits are issued to the customer when items are
returned. Often the Company will receive a vendor credit from the manufacturer
related to the product in question. The Company does not provide a warranty on
products sold; rather the warranty is provided by the manufacturer.
 
 The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company establishes and monitors the allowance for doubtful accounts based on
the credit risk of specific customers, customer concentrations, historical
trends and other information. The Company had net accounts receivable of
$7,774,588 and an allowance for doubtful accounts of $290,448 as of December 31,
2004. Although the Company believes its allowance is sufficient, if the
financial condition of the Company’s customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances would be
required.
  
  The
Company writes down its inventories for estimated slow moving and obsolete goods
in accordance with the lower of cost or market value, based upon assumptions
about future demand and market conditions. A significant sudden increase in the
demand for the Company’s products could result in a short-term increase in the
cost of inventory purchases, while a significant decrease in demand could result
in an increase in the amount of excess inventory quantities on-hand.
Additionally, the Company’s estimates of future product demand may prove to be
inaccurate, in which case the Company may have understated or overstated the
write-down required for excess and obsolete inventory. Goodwill and other
intangible assets amounting to $1,628,133 and $27,500 at December 31, 2004,
respectively, consist of assets arising from acquisitions.
 
 The
Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets,” (Statement No. 142) effective January 1, 2002.
Under Statement No. 142, goodwill is no longer amortized, but is reviewed at
least annually for impairment. In assessing the recoverability of the Company’s
goodwill, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets and
liabilities of the reporting unit. Upon adoption and again as a result of the
Company’s annual impairment test, there was no indication of impairment for
goodwill acquired in prior business combinations. If the Company’s estimates or
their related assumptions change in the future, the Company may be required to
record impairment charges related to its goodwill.
 
 The
Company has accounted for, and currently accounts for, income taxes in
accordance with Statement 109 “Accounting for Income Taxes.” This statement
establishes financial accounting and reporting standards for the effects of
income taxes that result from an enterprise’s activities during the current and
preceding years. It requires an asset and liability approach for financial
accounting and reporting of income taxes. The realization of future tax benefits
of deductible temporary differences and operating loss or tax credit
carryforwards will depend on whether the Company will have sufficient taxable
income of an appropriate character within the carryback and carryforward period
permitted by the tax law to allow for utilization of the deductible amounts and
carryforwards. Without sufficient taxable income to offset the deductible
amounts and carryforwards, the related tax benefits will expire unused. The
Company evaluates both positive and negative evidence in making a determination
as to whether it is more likely than not that all or some portion of the
deferred tax asset will not be realized. As of December 31, 2004, the Company
had a deferred tax valuation allowance of approximately $13.5
million.
 
 Comparison
of Year Ended December 31, 2004 with Year Ended December 31, 2003
 
 The
Company had net income of $1,661,156 for the year ended December 31, 2004. This
compares with net income of $1,320,263 for the year ended December 31,
2003.
 
 Sales for
the year ended December 31, 2004 were $61,454,128, an increase of $16,782,992
(37.6%), from $44,671,136 in 2003. This increase reflects approximately
$9,625,000 additional sales from the inclusion of sales from RAL for the full
year of 2004 as compared to three months of 2003. In addition, $3,337,000 of the
increase resulted from two new locations for a full year compared to six months
in 2003 and the balance relates to increased market penetration from existing
locations.
  
  Gross
profit in 2004 increased $5,217,665 or 39.6% over 2003, primarily as a result of
the revenue increases related to the RAL acquisition being included for the full
year of 2004, the inclusion of two new branches for the full year of 2004 and
improved selling margins. Gross profit margin increased to 29.9% in 2004 from
29.5% in 2003, primarily due to a change in product mix and higher gross margins
at RAL.
 
 Selling,
general, and administrative expenses in 2004 increased $4,796,450 or 40.4% over
2003, primarily related to the full year costs of the RAL acquisition, two new
locations opened in 2003, and the opening of the Deptford location on November
1, 2004.
 
 Other
income in 2004 decreased $4,008 or 1.3%, compared to 2003. Interest expense in
2004 increased $237,896 or 37.2% over 2003, as a factor of increased credit
facility borrowings to support increased sales, accounts receivable and
inventory.
 
 Income
tax benefit increased $161,512 for 2004. This increase was primarily attributed
to the Company, for the year ended December 31, 2004, recording a deferred tax
benefit of $645,600, compared to a deferred tax benefit recorded in 2003 of
$421,400. These income tax benefits are the results from a decrease in its
valuation allowance on deferred tax assets in recognition of its anticipated
utilization of net operating loss carryforwards.
 
 Accounts
receivable in 2004 increased $1,520,688 or 24.3%, over 2003 and inventory
increased $1,219,492 or 12.5%, over 2003. These increases are directly related
to increased sales for 2004.
 
 Comparison
of Year Ended December 31, 2003 with Year Ended December 31, 2002
 
 The
Company had net income of $1,320,263 for the year ended December 31, 2003. This
compares with net income of $3,194,385 for the year ended December 31, 2002,
which included net income from the operations of discontinued segments of
$3,300,695 and a loss from continuing operations of $106,310.
 
 Sales for
the year ended December 31, 2003 were $44,671,136, an increase of $7,672,336
(20.7%), from $36,998,800 in 2002. This increase reflects approximately
$3,000,000 in sales related to the September 2003 RAL acquisition, $1,700,000 in
sales by reason of incorporating the results of Goldman for the full year in
2003 instead of for only six months in 2002; $950,000 from two new locations
started in July 2003; and the balance relates to increased market penetration
from existing locations.
 
 Net
income from continuing operations increased due to business expansion related to
the Goldman acquisition being reported for a full year, the RAL acquisition in
the fourth quarter and market penetration. Gross margins increased 0.8% to
29.5%, due to a change in product mix and higher gross margins at RAL. Selling
general and administrative expense in 2003 increased $1,477,156 to $11,869,885,
but total general and administrative expense as a percentage of sales decreased
to 26.6% from 28.1% as a result of operating efficiencies.
 
 Other
income relates to service charges collected from customers of slower paying
accounts, and increased by $38,396 to $324,367 directly related to increased
sales. Interest expense increased by $55,122 to $638,742, based upon increased
borrowings related to increased sales, accounts receivable, inventory and the
RAL acquisition.
 
 For the
year ended December 31, 2003, the Company recorded a deferred tax benefit in the
amount of $421,400 resulting from a decrease in its valuation allowance on
deferred tax assets in recognition of its anticipated utilization of net
operating loss carryforwards.
  
  Accounts
receivable increased by $1,067,008 to $6,253,900 directly related to increased
sales, the RAL acquisition and the opening of two new branch locations. A
$4,052,598 increase in inventory from $5,730,224 to $9,782,822 related in major
part to the RAL acquisition made on September 30, 2003.
 
 The
increase in trade payables of $2,848,993 to $5,295,879 relates to the
acquisition of inventory necessary for the operation of the business to support
the RAL acquisition and the Company’s two new locations.
 
 Liquidity
and Capital Resources
 
 Credit
Facility
 
 On July
29, 2004, the Company completed a $15,000,000 secured loan facility with Wells
Fargo Business Credit, Inc. consisting of a revolving line of credit including a
$2,000,000 two-year term loan. This represents a $1,500,000 increase from its
previous line of credit. The revolving credit line bears interest at .25% below
prime, a decrease of 75 basis points from its previous line of credit, and the
term loan bears interest at .50% above prime, a decrease of 200 basis points
from its previous line of credit. Substantially all of the assets of the
Company, as well as a pledge of all the stock of Colonial Commercial Corp.’s
operating subsidiaries collateralize all loans. The facility contains covenants
relating to the financial condition of the Company and its business operations
and restricts the payment of dividends, subordinated debt, purchase of
securities and capital expenditures ($550,000 per year). The Company must
maintain a tangible net worth of approximately $1.5 million for the fiscal
quarter ending December 31, 2004. In addition, the Company is required to
maintain certain levels of net income and cash flows, as defined in the
agreement. Availability under the revolving credit line is determined by a
percentage of eligible assets as defined in the agreement. The Company used
approximately $12,865,000 of the proceeds of this facility to repay its previous
senior lender and used the balance for additional working capital.
 
 At
December 31, 2004, the amount outstanding under the Company’s credit facility
was $12,325,209 and $1,247,040 was available to the Company based on available
collateral. The Company believes that its credit facility is sufficient to
finance its current operating needs.
 
 Net cash
flows used in operating activities in 2004 were $2,165,280 in comparison to
$409,903 provided by operations activities in 2003. The 2004 decrease in
operating cash flows was due primarily to an increase in inventory and an
increase in accounts receivable.
 
 Cash
flows provided from financing activities in 2004 consisted of $1,647,875
issuance of common stock and exercise of stock options, $1,173,392 from issuance
of notes payable, $187,500 of issuance of warrants and $93,179 net borrowings on
the Company’s credit facility. Cash flows used in financing activities consisted
of repayment of notes in the amount of $105,883 and $355,639 retirement of
preferred stock.
 
 Equity
Transactions
 
 On
February 12, 2004, the Company completed a private placement, pursuant to
Regulation D of the Securities Exchange Act of 1933. The Company raised $360,000
through the issuance of 600,000 shares of common stock at $0.60 per
share.
  
  The
Company used substantially all of the proceeds from the February 12, 2004
private placement to purchase 592,730 shares of escheated convertible preferred
stock at $0.60 per share from the State of Ohio. The Company retired these
convertible preferred shares.
 
 On July
29, 2004, the Company completed a private placement, pursuant to Regulation D of
the Securities Exchange Act of 1933. The Company raised $1,050,000 through the
issuance of 420,000 shares of common stock at $1.25 per share and the issuance
of $525,000 of subordinated unsecured convertible notes payable (“Notes”),
bearing interest at 11% per annum, interest payable quarterly, with 50% of the
principal payable on June 1, 2008 and the balance on June 1, 2009. The Notes are
convertible into 175,000 shares of common stock at $3.00 per share during the
term of the Notes.
 
 On July
30, 2004, the Company completed a private placement with Michael Goldman and
Goldman Associates of New York, Inc. pursuant to Regulation D of the Securities
Exchange Act of 1933. For total consideration of $1,500,000, the Company issued
to Goldman Associates of New York, Inc. 600,000 shares of common stock at $1.25
per share, a $750,000 subordinated secured note payable, earning interest at the
prime rate, interest payable quarterly, principal payable June 30, 2008, and
warrants to purchase 150,000 shares of common stock at $3.00 per share expiring
June 30, 2008. The $187,500 estimated value of the warrants was accounted for as
an increase to additional paid in capital and as a discount to the note
payable.
 
 These
securities were issued in reliance on the exemption set forth in Section 4(2) of
the Act from registration requirements under the Act.
 
 During
the year ended December 31, 2004, the Company converted 83,623 shares of
convertible preferred stock to a similar number of common shares.
 
 During
the year ended December 31, 2004, the Company issued 51,500 shares of common
stock pursuant to the exercise of outstanding stock options. James Stewart
obtained 45,000 shares of common stock, by exercising his outstanding stock
options on November 1, 2004. Mr. Stewart was the CFO and a Director of the
Company until October 19, 2004, at which time he resigned. Gerald Deutsch, a
former Director of the Company, acquired 6,500 shares of common stock by
exercising his stock options on October 25, 2004.
 
 Contractual
Obligations:
 
 The
following table represents certain contractual commitments associated with
operating agreements, obligations to financial institutions and other long-term
debt obligations as of December 31, 2004:
  
  Payments
      due by Period
      (in
      thousands)Total
    
    Less
      than1
      Year
    
    1-3
      Years
    
    4-5
      Years
    
    Over5
      YearsOperating
      leases
    
    $
    12,055
    
    $
    2,720
    
    $
    6,808
    
    $
    1,321
    
    $
    1,206Compensation
      agreements
    
    
    1,835
    
    
    680
    
    
    1,155Notes
      payable
    
    
    1,514
    
    
    115
    
    
    1,131
    
    
    268Line
      of credit
    
    
    12,325
    
    
    12,325
    
    
    -
    
    
    -
    
    
    -Totals
    
    $
    27,729
    
    $
    15,840
    
    $
    9,094
    
    $
    1,589
    
    $
    1,206
 
 Impact
of Inflation and Seasonality
 
 To date,
inflation has not had a significant impact on the Company’s operations. The
Company’s business is affected by significant outdoor temperature swings. Demand
related to the residential central air conditioning replacement market is
highest in the second and third quarters with demand for heating equipment
usually highest in the fourth quarter.
 
 Item
      7A.
    Quantitative
      And Qualitative Disclosures About Market
Risk
 
 Market
risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. The Company has no financial instruments that
give it exposure to foreign exchange rates or equity prices.
 
 The
Company’s pre-tax earnings and cash flows are exposed to changes in interest
rates as all borrowings under its credit facility bear interest based on the
prime rate less .25%, except for the $2.0 million term loan, which bears
interest at a rate of prime plus .5%. A hypothetical 10% adverse change in such
rates would reduce the pre-tax earnings and cash flow for the year ended
December 31, 2004 by approximately $67,000 over a one-year period, assuming the
borrowing level remains consistent with the outstanding borrowings as of
December 31, 2004. The fair value of the borrowings under the credit facility is
not affected by changes in market interest rates.
 
 The
Company’s remaining interest-bearing obligations are at fixed rates of interest
and as such do not expose pre-tax earnings and cash flows to changes in market
interest rates. The change in fair value of the Company’s fixed rate obligations
resulting from a hypothetical 10% adverse change in interest rates would not be
material.
 
 Item
      8.
    Financial
      Statements and Supplementary Data
 
 The
consolidated financial statements of the Company, together with the independent
auditors’ report thereon of Weiser LLP and KPMG LLP, appears herein. See Index
to Financial Statements appearing on page F-1.
 
 Item
      9.
    Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosures
 
 None
 
 
  Item
      9A.
    Controls
      and Procedures
   Evaluation
of Disclosure Controls and Procedures
 
 An
evaluation has been carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and the operation of our "disclosure
controls and procedures" (as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of December 31, 2004 (“Evaluation Date”).
Based on such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of the Evaluation Date, the disclosure controls
and procedures are reasonably designed and effective to ensure that (i)
information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
(ii) such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
 
 PART
III
 Item
      10.
    Directors
      and Executive Officers of the
Registrant
 The
names, ages and positions of the Registrant’s directors and 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 arrangements or understandings between any directors or
officers and any other person pursuant to which any of such officers were
selected as executive officers. Melissa Goldman is the daughter of Michael
Goldman.
 
 Name
    Age
    Position
      with the CompanyCommon
      Stock Directors and Executive Officers:E.
      Bruce Fredrikson
    67
    Director,
      Chairman of Audit CommitteeMelissa
      Goldman
    37
    DirectorMichael
      Goldman
    66
    DirectorBernard
      Korn
    79
    Chairman
      of the Board, President and Chief Executive Officer of the
      CompanyWilliam
      Pagano
    65
    President
      of Universal, DirectorWilliam
      Salek
    44
    Chief
      Financial Officer, SecretaryCarl
      L. Sussman
    80
    DirectorPaul
      H. Hildebrandt
    67
    Director
      (resigned January 28, 2005)James
      W. Stewart
    59
    Executive
      Vice President, Treasurer and Secretary of the Company, Director (resigned
      October 19, 2004)Convertible
      Preferred Stock Directors:William
      Koon
    74
    DirectorRonald
      Miller
    60
    DirectorJack
      Rose
    85
    Director
  
  Dr. E.
Bruce Fredrikson
 
 Dr. E.
Bruce Fredrikson has been a Director of the Company since January 28, 2005. Dr.
Fredrikson is currently an independent consultant in corporate finance and
governance. He is Professor of Finance, Emeritus, at Syracuse University's
Martin J. Whitman School of Management where he taught from 1966 until his
retirement in May 2003. He is a director of Consumer Portfolio Services, Inc., a
consumer finance company and of Track Data Corporation, a financial services
company. Dr. Fredrikson holds an A.B. in economics from Princeton University and
a M.B.A. in accounting and a Ph.D. in finance from Columbia
University.
 
 Melissa
Goldman
 
 Melissa
Goldman has been a Director of the Company since October 22, 2004. Ms. Goldman
has been the Chief Operating Officer of Goldman Associates of NY, Inc., an
appliance distributor, since 1996, and is also a member of the Board of
Directors of said company. Ms. Goldman holds a B.A. from Lehigh University and a
Masters Degree in Environmental Management from Duke University. Previously, she
was employed as an Environmental Consultant for a private consulting
firm.
 
 Michael
Goldman
 
 Michael
Goldman has been a Director of the Company since September 29, 2004. Mr. Goldman
has been the Chief Executive Officer and Chairman of the Board of Directors of
Goldman Associates of NY, Inc., an appliance distributor, since 1987. Mr.
Goldman is a certified public accountant and holds a B.S. in Accounting from
Brooklyn College and an M.B.A. in Management from Syracuse
University.
 
 Bernard
Korn
 
 Bernard
Korn has been Chairman of the Board of Directors and Chief Executive Officer of
the Company since its inception in 1964. Mr. Korn became a certified public
accountant in 1952 and is the holder of a B.S. in Accounting from Long Island
University. He is also the holder of an honorary degree, Doctor of Humane
Letters, from Long Island University.
 
 William
Pagano
 
 William
Pagano has been the President of Universal since November 1998 and was appointed
as a Director of the Company in February 2002. Prior to November, 1998 Mr.
Pagano was engaged in the practice of law for 20 years. Mr. Pagano holds a B.S.
in Industrial Management, and an M.B.A., both from Fairleigh Dickinson
University. He also holds a J.D. from Seton Hall University and is an attorney
at law licensed in the State of New Jersey.
 
 William
Salek
 
 William
Salek has been the Vice President of Universal since June 1999 and was appointed
as the Chief Financial Officer of the Company in October 2004 and Secretary of
the Company in February 2005. Mr. Salek holds a B.S. in Accounting from Clarion
University. He has been employed by Universal since 1983.
  
  Carl L.
Sussman
 
 Carl L.
Sussman has been a Director of the Company since 1964. Mr. Sussman holds a B.S.
in Pharmacy from Long Island University. He was a practicing pharmacist and a
Vice President of Southern Mortgage Associates, Inc., a licensed mortgage
banking company. He is currently retired and is a private investor in the
Company.
 
 William
Koon
 
 William
Koon has been a Director of the Company since 1983. Mr. Koon has been Chairman
of the Board of Republic Mills, Inc. since 1995, a manufacturer of pet feed and
related products, and Chairman of the Board of Lord’s Enterprises, Inc. since
1958, a grain storage and sales company, and owner and manager of farms.
 
 Jack
Rose
 
 Jack Rose
has been a Director of the Company since 1983. Mr. Rose is a farm owner and
manager. Mr. Rose is a former President of the Ohio Farmers’ Union and a former
member of the Executive Advisory Board of Ohio State University. He is retired
and is a private investor in the Company.
 
 Ronald
Miller
 
 Ronald
Miller has been a Director of the Company since 1983. Mr. Miller holds a B.S. in
Education from Ohio State University and a J.D. from Ohio State University. Mr.
Miller has been engaged in the practice of law since 1969 and as a sole
practitioner since 1988. He is an acting Judge of Auglaize County Municipal
Court in the State of Ohio.
 
 Audit
Committee
 
 The
Company has a separately designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. Serving on the
Committee are E. Bruce Fredrikson, Ronald Miller and William Koon. The Board of
Directors had determined that it has two audit committee financial experts
serving on the audit committee, Dr. Fredrikson and Ronald Miller. Both Dr.
Fredrikson and Mr. Miller are independent directors as defined in Item
7(d)(3)(iv) of Schedule 14A.
 
 Code of
Ethics
 
 The
Company has adopted a Code of Ethics that applies to its Chief Executive Officer
and Chief Financial Officer.
 
 Compliance
with Section 16(a) of the Exchange Act
 
 Other
than as set forth below, the Company believes that during the period from
January 1, 2004 through December 31, 2004, all executive officers, directors and
greater than 10% beneficial owners, complied with Section 16(a) filing
requirements.
  
  Item
      11.
    Executive
      Compensation.
 
 Executive
Compensation
 
 The
following table sets forth information about compensation paid or accrued by the
Company during the fiscal years ended December 31, 2004, 2003 and 2002 to
Bernard Korn, William Pagano and William Salek, the only executive officers of
the Company and its Subsidiaries whose compensation exceeded
$100,000.
 
 Summary
Compensation Table
 
 Annual
      CompensationName
      and Principal Position
    Year
    Salary
      ($)
    Bonus
      ($)
    Long-Term
      Compensation StockOptions
      (Shares)Bernard
      Korn
    2004
    150,000
    -Chairman
      of the Board,
    2003
    158,654
    -
    60,000President,
      Chief Executive
    2002
    200,000
    -
    -Officer
      and DirectorWilliam
      Pagano
    2004
    200,000
    240,862
    -President,
      Universal
    2003
    200,000
    232,257
    -2002
    200,000
    194,734
    -William
      Salek
    2004
    105,000
    27,350
    -CFO,
      Colonial Commercial
    2003
    95,000
    25,736
    -Corp.
      and Vice President of
    2002
    85,000
    13,125
    -Finance,
      Universal
 
 The above
table does not include certain prerequisites and other personal benefits, the
total value of which does not exceed the lesser of $50,000 or 10% of such
person's cash compensation.
  Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
 
 The
following table sets forth information concerning the value of unexercised stock
options at the end of the 2004 fiscal year for the persons named in the Summary
Compensation Table.
 
 Shares
      Acquired On Exercise (#)
    
    Value
      Realized($)
    
    Number
      of Unexercised Options at Fiscal Year-End Exercisable/Unexercisable
    
    Value
      of Unexercised In-The-Money Options at Fiscal Year-End Exercisable/UnexercisableBernard
      Korn
    
    
    0
    
    
    0
    
    
    87,000/0
    
    $
    121,800William
      Pagano
    
    
    0
    
    
    0
    
    
    20,000/0
    
    $
    28,000William
      Salek
    
    
    0
    
    
    0
    
    
    5,000/0
    
    $
    7,000
 
 There are
no stock appreciation rights, long-term incentive plans or pension plans.
 
 Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements
 
 Mr. Korn
is employed pursuant to an employment agreement (the “Agreement”), expiring
December 31, 2008, at an annual compensation of $150,000 per annum for the years
2004 and 2005 and increasing to $200,000 per annum for the period January 1,
2006 through December 31, 2008. In the event of Mr. Korn’s death, the Agreement
provides for continued compensation payments for a period of one year. In the
event of Mr. Korn’s disability, he will receive compensation for the balance of
the term of the agreement at the rate of compensation then in effect.
  
  Mr.
Pagano is employed pursuant to an employment agreement expiring on December 31,
2005 at a compensation of $200,000 per annum. The agreement also provides for
additional incentive compensation based on a percentage of earnings, as defined,
of Universal.
 
 Effective
January 1, 2005, Mr. Salek is employed pursuant to an employment agreement
expiring on December 31, 2007 at a compensation of $120,000 per annum. The
agreement also provides for additional incentive compensation based on a
percentage of earnings, as defined, of Universal.
 
 Mr. Salek
is the Chief Financial Officer of the Company and Vice President and Director of
Universal, a wholly owned Subsidiary of the Company. Mr. Pagano is an executive
officer of Universal and a Director of the Company. Mr. Korn is the Chairman of
the Board and executive officer of the Company and a Director of Universal, a
wholly owned Subsidiary of the Company.
 
 Note: See
“Certain Relationships and Related Transactions,” Section 13.
 
 Director’s
Compensation
 
 Members
of the Board of Directors, other than those employed by the Company or its
Subsidiaries, receive a fee of $1,000 for each meeting of the Board attended,
limited to $4,000 per annum, in addition to an annual retainer of $2,000.
Effective April 1, 2005, outside Directors’ fees will be increased to $12,000
annually consisting of an annual retainer of $8,000 and a fee of $1,000 for each
meeting of the Board, limited to $4,000 per annum. Members of the Board of
Directors, employed by the Company or its Subsidiaries, receive no
fees.
 
 Compensation
Committee Interlocks and Insider Participation
 
 The
Company does not have a Compensation Committee or any other committee of the
Board of Directors performing equivalent functions. Decisions regarding
compensation of executive officers of the Company are made by the Board of
Directors. Two of the company’s executive officers, Bernard Korn and William
Pagano, are directors of the Company. Each of these individuals participated in
deliberations of the Board during the fiscal year ended December 31, 2004
concerning executive officer compensation, except that they abstained from
deliberations and voting regarding their own compensation.
 
 Item
12. Security Ownership of Certain Beneficial Owners and
Management
 
 The
following table sets forth, as of April 7, 2005, information with respect to
equity ownership by directors of the Company, holders of over 5% of a class of
stock and of directors and officers of the Company as a group.
  
  Common
      Stock
    
    
    
    
    
    Convertible
      Preferred StockName
      of BeneficialOwner
    
    Amount
      and Nature of BeneficialOwnership*
    
    
    
    Percentof
      Class
    
    Amount
      and Nature of BeneficialOwnership
    
    Percentof
      ClassOfficers
      andDirectors:E.
      Bruce Fredrikson
    
    
    5,000
    
    
    (1
    )
    
    
    
    
    500Melissa
      Goldman
    
    
    5,400
    
    
    (1
    )Michael
      Goldman
    
    
    933,000
    
    
    (2
    )
    
    21.58
    %William
      Koon
    
    
    18,741
    
    
    (3
    )
    
    
    
    
    6,259Bernard
      Korn
    
    
    629,255
    
    
    (4
    )
    
    14.40
    %
    
    119,694
    
    
    15.14
    %Ronald
      H. Miller
    
    
    12,893
    
    
    (1)(5
    )
    
    
    
    
    893William
      Pagano
    
    
    667,973
    
    
    (6
    )
    
    15.81
    %Jack
      Rose
    
    
    204,567
    
    
    (7
    )
    
    4.83
    %
    
    48,371
    
    
    6.12
    %William
      Salek
    
    
    61,667
    
    
    (8
    )
    
    1.47
    %Carl
      L. Sussman
    
    
    112,107
    
    
    (9
    )
    
    2.68
    %All
      Officers and Directors as a group
    
    
    2,650,603
    
    
    
    
    
    56.42
    %
    
    175,717
    
    
    22.23
    %Other
      holders of over 5%:Rita
      C. Folger
    
    
    478,719
    
    
    (10
    )
    
    11.38
    %
    
    61Richard
      Rozzi
    
    
    399,365
    
    
    
    
    
    9.57
    %Total
      all Officers, Directors and over 5% holders as a Group
    
    
    3,528,687
    
    
    
    
    
    74.58
    %
    
    175,778
    
    
    22.24
    %
 
 The
beneficial owners listed above have all given a business address of 120 New
South Road, Hicksville, New York 11801.
 
 * For the
purposes of this table, “Beneficial Ownership” is defined as set forth in rule
13d-3 under the Securities Exchange Act of 1934, as amended. Except as set forth
in the following notes, each person listed in the table has sole voting and sole
investment power with respect to the shares of Common Stock listed in the
table.
  
  (1) Ms.
Melissa Goldman and Messrs. Miller and Fredrikson, each are the beneficial
owners of less than one percent of the Company’s outstanding securities. As a
result, their respective percentages of ownership have not been
disclosed.
 
 (2) Michael
Goldman’s beneficial ownership consists of 183,000 shares of Common Stock, a
warrant to purchase 150,000 shares of Common Stock at a conversion price of
$3.00 per share, and 600,000 shares of Common Stock held by Goldman Associates
of NY, Inc. Michael Goldman is the beneficial owner of the shares held by
Goldman Associates of NY, Inc. Mr. Goldman’s beneficial ownership excludes
20,000 shares of Common Stock owned by Mrs. Goldman, of which Goldman Associates
of New York, Inc. and Michael Goldman disclaims beneficial ownership. Mrs.
Goldman disclaims beneficial ownership of her husband’s shares.
 
 (3) William
Koon’s beneficial ownership consists of 482 shares of Common Stock, 12,000
shares of Common Stock issuable at any time upon exercise of his options, and
6,259 shares of Common Stock issuable upon conversion of 6,259 shares of
Convertible Preferred Stock. Mr. Koon’s beneficial ownership excludes 10,600
shares of Common Stock and 5,000 shares of Convertible Preferred Stock owned by
Mrs. Koon. Mr. Koon disclaims beneficial ownership of his wife’s shares and Ms.
Koon disclaims beneficial ownership of her husband’s shares. Mr. Koon is the
beneficial owner of less than one percent of the Company’s outstanding
securities, and as a result, his respective percentage of ownership has not been
disclosed.
 
 (4) Bernard
Korn’s beneficial ownership consists of 432,561 shares of Common Stock, 77,000
shares of Common Stock issuable at any time upon exercise of his options, and
119,694 shares of Common Stock issuable upon conversion of 119,694 shares of
Convertible Preferred Stock.
 
 (5) Ronald H.
Miller’s beneficial ownership consists of 12,000 shares of Common Stock issuable
at any time upon exercise of his options, and 893 shares of Common Stock
issuable upon conversion of 893 shares of Convertible Preferred Stock.
 
 (6) William
Pagano’s beneficial ownership consists of 614,640 shares of Common Stock, 20,000
shares of Common Stock issuable at any time upon exercise of his options, and
33,333 shares of Common Stock issuable at any time upon conversion of a $100,000
Convertible Note at a conversion price of $3 per share.
 
 (7) Jack
Rose’s beneficial ownership consists of 144,196 shares of Common Stock, 12,000
shares of Common Stock issuable at any time upon exercise of his options, and
48,371 shares of Common Stock issuable upon conversion of 48,371 shares of
Convertible Preferred Stock.
 
 (8) William
Salek’s beneficial ownership consists of 40,000 shares of Common Stock, 5,000
shares of Common Stock issuable at any time upon exercise of his options, and
16,667 shares of Common Stock issuable at any time upon conversion of a $50,000
Convertible Note at a conversion price of $3 per share.
 
 (9) Carl L.
Sussman’s beneficial ownership consists of 56,000 shares of Common Stock, 12,000
shares of Common Stock issuable at any time upon exercise of his options and
44,107 shares of Common Stock owned jointly by Mr. Sussman and his
wife.
 
 (10) Rita C.
Folger’s beneficial ownership consists of 445,325 shares of Common Stock, 33,333
shares of Common Stock issuable at any time upon conversion of a $100,000
Convertible Note at a conversion price of $3 per share and 61 shares of Common
Stock issuable upon conversion of 61 shares of Convertible Preferred Stock. Mrs.
Folger is the wife of Oscar Folger, the Company’s legal counsel. Mr. Folger’s
beneficial ownership consists of 5,000 shares of Common Stock issuable at any
time upon exercise of his options. Mr. Folger disclaims beneficial ownership of
his wife’s shares, and Mrs. Folger disclaims beneficial ownership of her
husband’s shares.
  
  Item
      13.
    Certain
      Relationships and Related Transactions
 
 The
Company leases a store with a warehouse located in Wharton, New Jersey
comprising of 27,000 square feet from a company owned by Mr. Paul Hildebrandt
under a lease that expires in June 2010. The Company paid Mr. Hildebrandt’s
company $206,097 and $195,030 during the years ended December 31, 2004 and 2003,
respectively. The Company owes Mr. Hildebrandt $170,000 pursuant to two notes:
(a) a subordinated note in the amount of $120,000, paid $30,000 annually
commencing December 31, 2004 and (b) a $50,000 convertible note due 50% on June
1, 2008 and 50% on June 1, 2009. William Salek, the Company’s Chief Financial
Officer, is the son-in-law of Mr. Hildebrandt.
 
 Pursuant
to the Private Placement Agreement, Goldman Associates agreed that it and its
affiliates will not until May 31, 2008 without the prior written consent of the
Board of Directors of the Company (i) acquire, agree to acquire or make any
proposal to acquire any voting securities or assets of the Company or any of its
affiliates, (ii) propose to enter into any merger, consolidation,
recapitalization, business combination, or other similar transaction involving
the Company or any of its affiliates, (iii) make, or in any way participate in
any “solicitation” of “proxies” (as such terms are used in the proxy rules of
the Securities and Exchange Commission) to vote or seek to advise or influence
any person with respect to the voting of any voting securities of the Company or
any of its affiliates or (iv) form, join or in any way participate in a “group”
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, in connection with any of the foregoing or (v) advise, assist or
encourage any other persons in connection with the foregoing.
 
 Messrs.
Goldman, Korn, Pagano, Rozzi, and Ms. Folger each signed a stock purchase and
sale standstill agreement in which they agreed until May 31, 2008 not to
purchase any stock without written consent from the Company and they will not
sell any stock to anyone when such a sale would create a new 5% shareholder
unless such person first enters into a similar standstill
agreement.
 
 In the
event that Mr. Pagano is no longer chief executive officer of the Company’s
wholly owned subsidiaries, by reason other than disability or death, the Company
will be considered in default of its credit agreement with Wells Fargo
Business Credit, Inc. unless a waiver is obtained.
 
 The
Company owes Goldman Associates, a private Company controlled by Michael
Goldman, $750,000 pursuant to a secured note which is subordinate to the
Company’s senior secured lender, bearing interest at the prime rate and due on
June 30, 2008. Melissa Goldman is the daughter of Michael Goldman. Eileen
Goldman is the wife of Michael Goldman.
 
 Mr.
Pagano, Mr. Salek, Ms. Folger and Eileen Goldman are holders of convertible
unsecured notes in the amounts of $100,000, $50,000, $100,000 and $25,000,
respectively, issued pursuant to the terms of a private placement made on July
29, 2004.
 
 On
January 24, 2005, Mr. Pagano executed a contract to purchase certain realty
owned by Zanzi Realty, Inc., located in Fishkill, New York. The aforementioned
realty is under lease agreement with RAL, a wholly owned Subsidiary of the
Company, as a tenant of the premises. On March 7, 2005, Mr. Pagano assigned the
contract to Pioneer Realty Holdings, LLC, a New York limited liability company.
Each of Messrs. Pagano and Paul Hildebrandt has a 35% interest in this entity.
Each of Rita Folger and Jeffrey Folger has a 4% interest in this entity. Jeffrey
Folger is the son of Oscar and Rita Folger.
  
  Oscar
Folger, who is legal counsel for the Company, is the husband of Rita Folger who
is a beneficial owner of the Company. Professional fees paid to Oscar Folger for
the years ended 2004, 2003, and 2002 were $71,115, $70,773, and $20,400,
respectively.
 
 Item
      14.
    Principal
      Accountant Fees And Services
 
 Audit
Fees
 
 The audit
fees for 2004 and 2003 were $170,125 and $152,375, respectively. All services
provided by independent accountants were approved by the audit committee. Audit
Fees consist of fees billed for professional services rendered for the audit of
the Company’s annual statements, for review of interim consolidated financial
statements included in quarterly reports and services that are normally provided
by Weiser LLP in connection with statutory and regulatory filings or
engagements.
 
 Audit
Related Fees
 
 The audit
related fees for 2004 and 2003 were $0.00 and $10,475, respectively.
Audit-Related Fees consist of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of the
Company’s consolidated financial statements and are not reported under "Audit
Fees."
 
 Tax
Fees
 
 Tax fees
for 2004 and 2003 were $0.00 and $10,000, respectively. Tax Fees consist of fees
billed for professional services rendered for tax compliance. These services
include assistance regarding federal, state and local tax
compliance.
 
 Other
Fees
 
 There
were no other fees for professional services rendered to the Company during the
fiscal years 2004 and 2003, other than the service reported above.
 
 The
Audit Committee:
 
 Meets
with the independent auditor prior to the audit and discusses the planning and
staffing of the audit;
 
 Approves
in advance the engagement of the independent auditor for all audit services and
non-audit services and approves the fees and other terms of any such engagement;
and
 
 Obtains
periodically from the independent auditor a formal verbal communication of the
matters required to be discussed by Statements of Auditing Standards No. 61 and
SEC Rule 10(a). In addition, the Company obtains a letter describing all
relationships between the auditor and the Company and discusses with the auditor
any disclosed relationships or services that may impact auditor objectivity and
independence.
  
  PART
IV
 
 Item
      15.
    Exhibits,
      Financial Statement Schedules and Reports on Form 8-K
 
 (a)
    Exhibits
      and Financial Statements
 (1)
    Financial
      Statements. See Item 8. Index to Financial
Statements
 (2)
    Financial
      Statement Schedules. See F-1 through F-30,
attached
 (3)
    Exhibits
 INDEX TO
EXHIBITS
 
 FiledHerewith
    Form
    Date
    Incorporated
      by Reference FromExhibit3      
      (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
    14      (a) 
      Specimen of Common Stock certificate(b) 
      Specimen above Convertible Preferred Stock certificate10   
      (a)  Employment Agreement dated as of January 1, 1998 between
      Registrant and Bernard Korn
    
    10-KSB
    3/31/99
    10(a)(i)   
      Amendment No. 1 dated April 1, 1999 to Employment Agreement dated as of
      January 1, 1998 Between Registrant and Bernard Korn
    
    10-K
    4/9/01
    10(a)(i)(ii)  
      Amendment No. 2 dated April 1, 2000 to Employment Agreement dated as of
      January 1, 1998 Between Registrant and Bernard Korn
    
    10-K
    4/9/01
    10(a)(ii)(iii) 
      Amendment No. 3 dated October 29, 2002 to Employment Agreement dated as of
      January 1, 1998 between Registrant and Bernard Korn
    
    10-K
    11/14/03(iv) 
      Amendment No. 4 dated October 29, 2002 to Employment Agreement dated as of
      January 1, 1998 between Registrant and Bernard Korn
    
    10-K
    11/14/03(v)  
      Amendment No. 5 dated May 17,2004, to Employment Agreement dated as of
      January 1, 1998 between Registrant and Bernard Korn
    Yes(b)  
      Employment Agreement dated as of January 1, 2000 between Registrant and
      James W. Stewart
    
    10-KSB
    3/31/99
    10(b)(i)   
      First Amendment dated September 15, 2000 to Employ- Agreement dated as of
      January 1, 2000 between Registrant and James W. Stewart
    
    10-K
    4/9/01
    10(b)(i)
  
  
 FiledHerewith
    Form
    Date
    Incorporated
      by Reference FromExhibit(ii)  
      Second Amendment dated October 29, 2002 to Employment Agreement dated as
      of January 1, 2000 between Registrant and James W. Stewart
    
    10-K
    11/14/03(c)  
      1996 Stock Option Plan
    
    S-8
    10/2/97
    28
      B(d)  
      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 Universal Supply Group,
      Inc. and William Pagano
    
    8-K
    7/8/99
    10(a)(iii)(iii)  
      Loan and Security Agreement dated June 24, 1999 between LaSalle Bank
      National Association and Universal Supply Group, Inc.
    
    8-K
    7/8/99
    10(a)(iv)(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
      Association dated June 24, 1999
    
    8-K
    7/8/99
    10(a)(vi)(vi) 
      Waiver and Tenth Amendment, dated November 21, 2002 to the Loan and
      Security Agreement, as of June 24, 1999, between LaSalle Bank National
      Association and Universal Supply Group, Inc.
    
    10-K
    12/31/01
    10(e)(vi)(vii)
      Securities Pledge Agreement dated November 21, 2002, made by the
      Registrant, in favor of LaSalle Bank National Association, re: Universal
      Supply Group, Inc.
    
    10-K
    12/31/01
    10(e)(vii)(f)   
      Certain documents related to Well-Bilt Steel Products,
    Inc.:(i)   
      Reaffirmation Agreement, General Release Consent and Acknowledgement of
      Commercial Reasonableness of Private Sale dated February 1, 2001, between
      Atlantic Hardware & Supply Corporation, Universal Supply Group, Inc.,
      Colonial Commercial Corp., and the secured lender
    
    8-K
    2/15/01
    10(a)(i)
 
  
  
 FiledHerewith
    Form
    Date
    Incorporated
      by Reference FromExhibit(ii)  
      Reaffirmation Agreement, General Release Consent and Acknowledgement of
      Commercial Reasonableness of Private Sale dated February 1, 2001 Between
      Well-Bilt Steel Products Inc. and the secured lender
    
    8-K
    2/15/01
    10(a)(ii)(iii)  
      Foreclosure Agreement dated February 1, 2001 between Independent Steel
      Products, LLC the secured lender, Atlantic Hardware & Supply
      Corporation, Universal Supply Group, Inc. and Well-Bilt Steel Products,
      Inc.
    
    8-K
    2/15/01
    10(a)(iii)(iv) 
      Bill of Sale and Assignment dated February 1, 2001 made by the Secured
      lender in favor of Independent Steel Products, LLC
    
    8-K
    2/15/01
    10(a)(iv)(g) 
       Inventory Control Agreement re: Universal Supply Group, Inc. taking
      in Inventory on a Consignment basis, dated August 9, 2001, between
      Douglas-Guardian Services Corporation, Universal Supply Group, Inc. and
      GMC Sales Corp.
    
    10-K
    12/31/01
    10(g)(h)  
      Agreement of Purchase and Sale of Assets dated July 1, 2002 between
      Goldman Associates of New York, Inc. and Universal Supply Group,
      Inc.
    
    10-K
    11/14/03(i)    
      Private Placement Purchase Agreement dated June 30, 2003 by and among
      Colonial Commercial Corp. and the persons who are counterparts to the
      Agreement as “Investors”
    
    10-K
    11/14/03(j)   
      Asset Purchase Agreement dated September 5, 2003, for the purchase of
      certain assets, subject to certain liabilities of RAL Supply Group, Inc.,
      by RAL Purchasing Corp., a wholly owned Subsidiary of Colonial Commercial
      Corp.
    
    8-K
    10/15/03(k)   RAL
      Closing Statement dated September 30, 2003.
    
    8-K
    10/15/03(l)   
      Private Purchase Placement Agreement dated July 29, 2004 by and among
      Colonial Commercial Corp. and the persons who are counterparts to the
      Agreement as “Investors” including:(i)   
      Private Placement Agreement and(ii)  
      Convertible Note Payable
    
    10-Q
    6/30/04(m)  
      Private Purchase Placement Agreement dated July 29, 2004 by and among
      Colonial Commercial Corp. and Michael Goldman and Goldman Associates of
      NY, Inc. including:(i)  
      Private Placement Agreement,(ii) 
      Secured Note(iii)
      Warrant
    
    10-Q
    6/30/04
 
  
  
 FiledHerewith
    Form
    Date
    Incorporated
      by Reference FromExhibit(n)  
      Certain documents related to refinance with Wells Fargo Business Credit,
      Inc. of asset based loan and term loan, dated July 28, 2004, previously
      with LaSalle Bank National Association(i)   
      Credit Security Agreement dated July 28, 2004 between American/Universal
      Supply, Inc.; RAL Supply Group, Inc. and Universal Supply Group, Inc. to
      Wells Fargo Business Credit, Inc.
    
    10-Q
    6/30/04(o)  
      Employment Agreement, dated January 20, 2005, between Universal Supply
      Group, Inc. and William Salek
    
    8-K
    1/20/0511   
      Statement re computation of per share earnings (loss) (not filed since
      computations are readily apparent from the Consolidated financial
      statements)14   
      Code of Ethics
    Yes21   
      Subsidiaries of Registrant
    Yes23.01
      Consent of Registered Public Accounting Firm
    Yes23.02
      Consent of Registered Public Accounting Firm
    Yes31.1
      Certification of Chief Executive Officer Pursuant to Rule 15d-14 of the
      Securities and Exchange Act of 1934, as amended, as Pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002
    Yes31.2
      Certification of Chief Financial Officer Pursuant to Rule 15d-14 of the
      Securities and Exchange Act of 1934, as amended, as Pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002
    Yes32.1
      Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
    Yes32.2
      Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
    Yes99.01
      Affidavit, dated January 28, 2002, in Support of Atlantic’s Petition for
      Relief under chapter 11 of the U. S. Bankruptcy Code
    
    10-K
    12/31/01
    99.1
 
 (b)
    Reports
      on Form 8-K during fourth quarter
 During
the fourth quarter of 2004, the Company filed the following Form
8-K’s:
 
 8-K
      Description
    DateFiledDeparture
      of Directors or Principal Officers;Election
      of Directors; Appointment of PrincipalOfficers
    10/22/04Results
      of Operation and Financial Condition;Press
      Release announcing earnings for thequarter
      and nine months ending 9/30/04
    11/15/04
  
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 
 Index to
Consolidated Financial Statements
 
 Contents
 
 PageReport
      Of Independent Registered Public Accounting Firm: Weiser LLP
    F-2Report
      Of Independent Registered Public Accounting Firm: KPMG
      LLP
    F-3Consolidated Balance Sheets as of December 31, 2004
      and 2003
    F-4Consolidated Statements of Operations for the Years
      Ended December 31, 2004, 2003 and 2002
    F-5Consolidated Statements of Stockholders’ Equity
      (Deficit) for the Years Ended December 31, 2004, 2003 and
      2002
    F-6Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2004, 2003 and 2002
    F-7Notes to the Consolidated Financial
      Statements
    F-8
      - F -30Report Of Independent Registered Public Accounting
      Firm (KPMG LLP) On the Schedule
    F-31Schedule II - Valuation and Qualifying
      Accounts
    F-32
 
 All other
schedules are omitted because they are not required or the information required
is given in the consolidated financial statements or notes thereto.
  F-1
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To the
Board of Directors and Stockholders of
 Colonial
Commercial Corp. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of Colonial Commercial
Corp. and Subsidiaries (the "Company") as of December 31, 2004 and December 31,
2003, and the related consolidated statements of operations, stockholders’
equity (deficit), and cash flows for the years then ended. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Colonial Commercial
Corp. and Subsidiaries as of December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
 
 We have
also audited the financial statement Schedule II [Valuation and Qualifying
Accounts] for the years ended December 31, 2004 and 2003. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
 
 /s/
Weiser LLP
 Certified
Public Accountants
 
 
 New York,
NY
 April 1,
2005
  F-2
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 
 The Board
of Directors and Stockholders
 Colonial
Commercial Corp.:
 
 We have
audited the accompanying consolidated statements of operations, stockholders’
equity (deficit), and cash flows of Colonial Commercial Corp. and Subsidiaries
for the year ended December 31, 2002. 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
audit.
 
 We
conducted our audit in accordance with the Public Company Accounting Oversight
Board (United States). 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 audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Colonial
Commercial Corp. and Subsidiaries for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in note 1(c) paragraphs 1, 2 and
3 to the financial statements, the Company had losses in 2001 and 2000,
stockholders’ deficit and had negative working capital. In addition, outstanding
borrowings under its credit facility are due on demand. If the bank were to
demand repayment, the Company does not project that it would have sufficient
liquidity to make such a payment. In addition, as discussed in note 2(c),
Atlantic Hardware & Supply Corporation (“Atlantic”), a wholly-owned
Subsidiary of the Company, filed for reorganization under Chapter 11 of the
United States Bankruptcy Code on January 28, 2002. The financial results of
Atlantic have been deconsolidated and the Company accounts for Atlantic using
the cost method. These circumstances raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in note 1(c) paragraphs 2 and 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 
 /s/ KPMG
LLP
 
 Melville,
New York
 October
2, 2003
  F-3
  COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
Balance Sheets
 
 December
      31,Assets
    
    2004
    
    2003Current
      assets:Cash
      and cash equivalents
    
    $
    310,659
    
    $
    342,756Accounts
      receivable, net of allowance for doubtful accounts of $290,448 in 2004 and
      $284,829 in 2003
    
    
    7,774,588
    
    
    6,253,900Inventory
    
    
    11,002,314
    
    
    9,782,822Prepaid
      expenses and other current assets
    
    
    865,732
    
    
    620,678Deferred
      tax assets - current portion
    
    
    574,061
    
    
    421,400Total
      current assets
    
    
    20,527,354
    
    
    17,421,556Property
      and equipment
    
    
    1,656,149
    
    
    1,515,131Goodwill
    
    
    1,628,133
    
    
    1,628,133Other
      intangibles
    
    
    27,500
    
    
    54,167Other
      assets - non current
    
    
    183,183
    
    
    -Deferred
      tax assets - noncurrent
    
    
    492,939
    
    
    -$
    24,515,258
    
    $
    20,618,987Liabilities and
      Stockholders' EquityCurrent
      liabilities:Trade
      payables
    
    $
    4,721,790
    
    $
    5,295,879Accrued
      liabilities
    
    
    1,744,006
    
    
    1,513,578Income
      taxes payable
    
    
    36,316
    
    
    175,614Borrowings
      under credit facility
    
    
    12,325,209
    
    
    12,232,030Notes
      payable - current portion; includes related party notes of $30,000 in 2004
      and $0 in 2003
    
    
    115,265
    
    
    104,205Total
      current liabilities
    
    
    18,942,586
    
    
    19,321,306Notes
      payable, excluding current portion; includes related party notes of
      $993,125 in 2004 and $0 in 2003
    
    
    1,398,774
    
    
    326,700Total
      liabilities
    
    
    20,341,360
    
    
    19,648,006Commitments
      and contingenciesStockholders'
      equity:Redeemable
      convertible preferred stock, $.05 par value, liquidation preference of $
      3,952,195 and $7,333,960 and 2,468,860 shares authorized, 790,439 in 2004
      and 1,466,792 in 2003 shares issued and outstanding
    
    
    39,522
    
    
    73,340Common
      stock, $.05 par value, 20,000,000 shares authorized, 4,158,441 in 2004 and
      2,403,318 in 2003 shares issued and outstanding
    
    
    207,922
    
    
    120,166Additional
      paid-in capital
    
    
    10,746,836
    
    
    9,259,013Accumulated
      deficit
    
    
    (6,820,382
    )
    
    (8,481,538
    )Total
      stockholders' equity
    
    
    4,173,898
    
    
    970,981$
    24,515,258
    
    $
    20,618,987
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
  
 COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
Statements of Operations
 
 For
      The Years Ended December 31,2004
    
    2003
    
    2002Sales
    
    $
    61,454,128
    
    $
    44,671,136
    
    $
    36,998,800Cost
      of sales
    
    
    43,069,981
    
    
    31,504,654
    
    
    26,379,504Gross
      profit
    
    
    18,384,147
    
    
    13,166,482
    
    
    10,619,296Selling,
      general and administrative expenses, net
    
    
    16,666,335
    
    
    11,869,885
    
    
    10,392,729Operating
      income
    
    
    1,717,812
    
    
    1,296,597
    
    
    226,567Interest
      income
    
    
    955
    
    
    885
    
    
    1,939Other
      income
    
    
    320,359
    
    
    324,367
    
    
    285,971Interest
      expense; includes related party interest of $45,007 in 2004, -0- in 2003
      and -0- in 2002
    
    
    (876,638
    )
    
    (638,742
    )
    
    (583,620
    )Income
      (loss) from continuing operations before income taxes (benefit)
      expense
    
    
    1,162,488
    
    
    983,107
    
    
    (69,143
    )Income
      taxes (benefit) expense
    
    
    (498,668
    )
    
    (337,156
    )
    
    37,167Income
      (loss) from continuing operations
    
    
    1,661,156
    
    
    1,320,263
    
    
    (106,310
    )Discontinued
      operation:Net
      income from operations of discontinued segments
    
    
    -
    
    
    -
    
    
    3,300,695Income
      of discontinued operation
    
    
    -
    
    
    -
    
    
    3,300,695Net
      income
    
    $
    1,661,156
    
    $
    1,320,263
    
    $
    3,194,385Income
      (loss) per common share:Basic:Income
      (loss) from continuing operations
    
    $
    0.49
    
    $
    0.67
    
    $
    (0.07
    )Income
      of discontinued operation
    
    
    -
    
    
    -
    
    
    2.06Net
      income per common share
    
    $
    0.49
    
    $
    0.67
    
    $
    1.99Diluted:Income
      (loss) from continuing operations
    
    $
    0.36
    
    $
    0.38
    
    $
    (0.07
    )Income
      of discontinued operation
    
    
    -
    
    
    -
    
    
    2.06Net
      income per common share
    
    $
    0.36
    
    $
    0.38
    
    $
    1.99Weighted
      average shares outstanding:Basic
    
    
    3,403,152
    
    
    1,971,129
    
    
    1,603,777Diluted
    
    
    4,587,966
    
    
    3,501,698
    
    
    1,603,777
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
  COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
Statements of Stockholders' Equity (Deficit)
 For The
Years Ended December 31, 2004, 2003 and 2002
 
 Number
      of sharesReedemable
      Convertible Preferred Stock
    
    Common
      Stock
    
    Reedemable
      Convertible Preferred Stock
    
    Common
      Stock
    
    Additional
      Paid-In Capital
    
    Accumulated
      Deficit
    
    Total
      Stockholders' Equity (Deficit)Balance
      at December 31, 2001
    
    
    1,464,286
    
    
    1,603,760
    
    $
    73,214
    
    $
    80,189
    
    $
    8,966,513
    
    
    ($12,996,186
    )
    
    ($3,876,270
    )Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    3,194,385
    
    
    3,194,385Conversion
      of shares of preferred stock to common stock
    
    
    (34
    )
    
    34
    
    
    (1
    )
    
    1
    
    
    -
    
    
    -
    
    
    -Balance
      at December 31, 2002
    
    
    1,464,252
    
    
    1,603,794
    
    
    73,213
    
    
    80,190
    
    
    8,966,513
    
    
    (9,801,801
    )
    
    (681,885
    )Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,320,263
    
    
    1,320,263Stock-based
      compensation
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    92,000
    
    
    -
    
    
    92,000Issuance
      of common stock
    
    
    -
    
    
    802,000
    
    
    -
    
    
    40,100
    
    
    200,500
    
    
    -
    
    
    240,600Other
    
    
    2,540
    
    
    (2,476
    )
    
    127
    
    
    (124
    )
    
    -
    
    
    -
    
    
    3Balance
      at December 31, 2003
    
    
    1,466,792
    
    
    2,403,318
    
    
    73,340
    
    
    120,166
    
    
    9,259,013
    
    
    (8,481,538
    )
    
    970,981Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,661,156
    
    
    1,661,156Stock-based
      compensation
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    62,025
    
    
    -
    
    
    62,025Conversion
      of shares of preferred stock to common stock
    
    
    (83,623
    )
    
    83,623
    
    
    (4,181
    )
    
    4,181
    
    
    
    
    
    -
    
    
    -Retirement
      of preferred stock
    
    
    (592,730
    )
    
    
    
    
    (29,637
    )
    
    
    
    
    (326,002
    )
    
    -
    
    
    (355,639
    )Issuance
      of common stock
    
    
    -
    
    
    1,620,000
    
    
    -
    
    
    81,000
    
    
    1,554,000
    
    
    -
    
    
    1,635,000Options
      exercised
    
    
    -
    
    
    51,500
    
    
    -
    
    
    2,575
    
    
    10,300
    
    
    -
    
    
    12,875Warrant
      value
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    187,500
    
    
    -
    
    
    187,500Balance
      at December 31, 2004
    
    
    790,439
    
    
    4,158,441
    
    $
    39,522
    
    $
    207,922
    
    $
    10,746,836
    
    
    ($6,820,382
    )
    $
    4,173,898
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6
  COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows
 
 For
      The Years Ended December 31,2004
    
    2003
    
    2002Cash
      flows from operating activities:Net
      income
    
    $
    1,661,156
    
    $
    1,320,263
    
    $
    3,194,385Adjustments
      to reconcile net income (loss) to net cash (used in) provided by operating
      activities:Income
      from discontinued operation
    
    
    -
    
    
    -
    
    
    (3,300,695
    )Deferred
      tax (benefit)
    
    
    (645,600
    )
    
    (421,400
    )
    
    -Stock-based
      compensation
    
    
    62,025
    
    
    92,000
    
    
    -Provision
      for doubtful accounts
    
    
    225,183
    
    
    188,050
    
    
    111,339Depreciation
    
    
    366,223
    
    
    232,315
    
    
    160,778Amortization
      of intangibles
    
    
    26,667
    
    
    41,666
    
    
    42,867Accretion
      of debt discount
    
    
    15,625
    
    
    -
    
    
    -Changes
      in operating assets and liabilities, net of the effects of
      acquisitions:Accounts
      receivable
    
    
    (1,745,871
    )
    
    (671,771
    )
    
    (328,923
    )Inventory
    
    
    (1,219,492
    )
    
    (1,770,078
    )
    
    652,661Prepaid
      expenses and other current assets
    
    
    (245,054
    )
    
    (151,378
    )
    
    38,587Other
      assets - noncurrent
    
    
    (183,183
    )
    
    -
    
    
    -Trade
      payables
    
    
    (574,089
    )
    
    1,533,048
    
    
    24,084Investment
      securities - trading
    
    
    -
    
    
    -
    
    
    122,506Accrued
      liabilities
    
    
    230,428
    
    
    (118,196
    )
    
    168,863Income
      taxes payable
    
    
    (139,298
    )
    
    135,384
    
    
    14,144Deferred
      compensation
    
    
    -
    
    
    -
    
    
    (122,506
    )Net
      cash (used in) provided by operating activities
    
    
    (2,165,280
    )
    
    409,903
    
    
    778,090Cash
      flows from investing activities:Cash
      acquired in acquisition of RAL Supply Group, Inc.
    
    
    -
    
    
    3,575
    
    
    -Payment
      for acquisition of Goldman Associates
    
    
    -
    
    
    -
    
    
    (670,981
    )Additions
      to property and equipment
    
    
    (507,241
    )
    
    (377,407
    )
    
    (169,936
    )Net
      cash used in investing activities
    
    
    (507,241
    )
    
    (373,832
    )
    
    (840,917
    )Cash
      flows from financing activities:Issuance
      of common stock and exercise of stock options
    
    
    1,647,875
    
    
    240,600
    
    
    -Issuance
      of notes payable; includes related party notes of $1,075,000 in 2004, -0-
      in 2003 and -0- in 2002
    
    
    1,173,392
    
    
    73,643
    
    
    -Issuance
      of warrant, related party
    
    
    187,500
    
    
    -
    
    
    -Retirement
      of preferred stock
    
    
    (355,639
    )
    
    -
    
    
    -Repayments
      on notes payable: includes related party repayments of $30,000 in 2004,
      -0- in 2003 and -0- in 2002
    
    
    (105,883
    )
    
    (38,402
    )
    
    (138,236
    )Net
      borrowings (repayments) under credit facility
    
    
    93,179
    
    
    (265,920
    )
    
    (78,687
    )Net
      cash provided by (used in) financing activities
    
    
    2,640,424
    
    
    9,921
    
    
    (216,923
    )(Decrease)
      increase in cash and cash equivalents
    
    
    (32,097
    )
    
    45,992
    
    
    (279,750
    )Cash
      and cash equivalents - beginning of year
    
    
    342,756
    
    
    296,764
    
    
    576,514Cash
      and cash equivalents - end of year
    
    $
    310,659
    
    $
    342,756
    
    $
    296,764
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-7
  COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 December
31, 2004, 2003 and 2002
 
 (1)
    Summary
      of Significant Accounting Policies and
Practices
 
 (a)
    Description
      of Business
 
 Colonial
Commercial Corp. (“Colonial”), through its operating Subsidiaries, Universal
Supply Group, Inc. (“Universal”), RAL Supply Group, Inc. (“RAL”) and
American/Universal Supply Inc. (“American”) (together the “Company”), is a
distributor of heating, ventilation and air conditioning (HVAC) and climate
control products and high-end plumbing fixtures to building contractors and
other users, which the Company considers its only continuing industry segment.
The Company’s products are marketed primarily to HVAC contractors, which, in
turn, sell such products to residential and commercial/industrial customers. The
Company’s customers are located in the United States, primarily in New York,
Pennsylvania and New Jersey. The Company’s discontinued Subsidiary, Atlantic
Hardware & Supply Corporation (“Atlantic”), in January 2002, filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. See Note 2
for more information on acquisitions and discontinued operations.
 
 (b)
    Principles
      of Consolidation
 
 The
consolidated financial statements include the accounts of Colonial and its
wholly-owned Subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
 (c)
    Going
      Concern
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company had losses in 2001 and
2000 of $7,602,324 and $8,033,197 and at December 31, 2002, had a stockholders’
deficit of $681,885 and negative working capital of $2,751,820. In addition,
outstanding borrowings under its credit facility of $10,350,889 at December 31,
2002, were due on demand. If the bank had demanded repayment, the Company did
not project that it would have had sufficient liquidity to make such a
payment.
 
 Management
recognized that the Company’s ability to continue as a going concern was
dependent upon its ability to generate profits. The Company has discontinued the
operations that generated the losses in 2001 and 2000. In addition, as a result
of implementing various cost cutting strategies in 2001 and 2002, the corporate
office realized a reduction in expenses in 2002 of $578,726, or 45%, as compared
to 2000. Universal took various cost cutting measures, including the use of
consignment inventory, which resulted in lower average borrowings, and,
therefore, lower interest expense to the Company. Furthermore, since 2000,
Universal’s 2002 sales have increased 14.4% or $4,656,640. Further sales
increases occurred in 2003 and 2004. These increases were primarily due to the
addition of product lines, acquisitions and exclusive geographical locations
granted Universal. The Company did not anticipate that demand for payment would
be made, as long as Universal continued to be profitable and remained in
compliance with the lending agreement. Universal has had increases in sales in
four of the past five years and has consistently generated operating
profits.
  F-8
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
  At
December 31, 2002, the Company expected to meet its liquidity needs going
forward through a combination of cash from operations, amounts available under
its credit facility and the issuance of stock through a private placement. At
December 31, 2002, $2,490,000 of the Company’s credit facility was payable over
a five year period. As of December 31, 2002, there was no assurance that the
Company would generate sufficient liquidity to maintain its current operations.
If the Company incurred losses and/or if the outstanding borrowings under its
credit facility were demanded to be repaid and the Company was unsuccessful in
obtaining new financing, the Company would likely have been required to seek
bankruptcy court or other protection from its creditors. The 2002 financial
statements did not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result, should the Company have been unable to continue
as a going concern.
 
 During
2003, the Company’s net income was $1,320,263 and the Company raised $240,600 in
a private placement, thereby eliminating its stockholders’ deficit and creating
stockholders’ equity in the amount of $970,981. In September 2003, the Company’s
lender increased its credit facility by $1,500,000 to $13,500,000 and approved
the company’s acquisition of RAL with a loan collateralized by accounts
receivable and inventory in the amount of $2,147,061 on December 31, 2003. The
Company had negative working capital of $1,899,750 as of December 31, 2003 (an
improvement of approximately $852,000 from 2002) as a result of the demand
feature of its credit facility requiring classification as a current liability.
The Company believed that its relationship with its lender was satisfactory and
that the facility would be available to the Company through its term, November
2005. At December 31, 2003, the Company’s lender waived the Company’s default of
its tax covenant because it had not filed its 2002 tax return and its capital
expenditures covenant for exceeding its limit for the 2003 year. The Company
believed that it had the ability to obtain an alternative lender in the unlikely
event its lender exercised its demand feature.
 
 During
2004, the Company’s net income was $1,661,156 and the Company raised $1,635,000
in private placements. The Company repaid in full the prior credit facility and
completed a $15,000,000 secured loan facility with Wells Fargo Business Credit,
Inc. consisting of a revolving line of credit including a $2,000,000 two-year
term loan. This represents a $1,500,000 increase from its previous line of
credit. The revolving credit line bears interest at .25% below prime, a decrease
of 75 basis points from its previous line of credit, and the term loan bears
interest at .50% above prime, a decrease of 200 basis points from its previous
line of credit. The Company has positive working capital of $1,584,768 as of
December 31, 2004 (an improvement of approximately $3,484,518 from 2003). The
Company believes that its relationship with its lender is satisfactory and that
the facility will be available to the Company through its term, August 2009.
These factors, together with the Company’s demonstrated ability to generate
profits, has eliminated management’s concern about the Company’s ability to
continue as a going concern.
  F-9
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 (d)
    Revenue
      Recognition
 
 Revenue
is recognized when the earnings process is complete, generally upon shipment of
products in accordance with shipping terms. There are no further obligations on
the part of the Company subsequent to revenue recognition, except for returns of
defective product from the Company’s customers, which are covered under the
manufacturer’s warranty. The Company will receive a vendor credit from the
manufacturer related to the warranted product in question, at which time credits
are issued to the customer. The Company does not provide a warranty on products
sold other than the warranty provided by the manufacturer.
 
 (e)
    Cash
      Equivalents
 
 The
Company considers all highly liquid investment instruments with an original
maturity of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 2004 or 2003.
 
 (f)
    Accounts
      Receivable
 
 Accounts
receivable consist of trade receivables recorded at original invoice amount,
less an estimated allowance for uncollectible accounts. Trade credit is
generally extended on a short-term basis; thus trade receivables generally do
not bear interest. However, a service charge may be applied to receivables that
are past due. These charges, when collected, are included as other income. Trade
receivables are periodically evaluated for collectibility based on past credit
history with customers and their current financial condition. Changes in the
estimated collectibility of trade receivables are recorded in the results of
operations for the period in which the estimate is revised. Trade receivables
that are deemed uncollectible are offset against the allowance for uncollectible
accounts. The Company generally does not require collateral for trade
receivables.
 
 (g)
    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.
 
 All costs
of shipping inventory to customers, are included in selling, general and
administrative expenses. Such costs were $325,109, $206,264, and $291,089 for
the years ended December 31, 2004, 2003 and 2002, respectively.
 
 (h)
    Property
      and Equipment
 
 Property
and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets as follows:
 
 Computer
      hardware and software
    3-5
      yearsFurniture
      and fixtures
    5
      yearsAutomobiles
    3-5
      years
  F-10
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the asset.
 
 (i)
    Goodwill
      and Other Intangible Assets
 
 Prior to
January 1, 2002, the Company amortized goodwill and intangible assets using the
straight-line method over periods of up to 10 years. Statement of Financial
Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets,"requires
that goodwill having indefinite lives not be amortized, but instead be tested
for impairment at least annually. Intangible assets determined to have finite
lives are amortized over their remaining useful lives.
 
 The
Company has determined that Universal and RAL are reporting units.
 
 (j)
    Stock
      Option Plan
 
 The
Company uses the intrinsic-value method of accounting for stock-based awards
granted to employees. In accordance with SFAS No. 148, “Accounting for Stock
Based Compensation - Transition and Disclosure,” the following table presents
the effect on net income and net income per share, had compensation cost for the
Company’s stock plans been determined consistent with SFAS No. 123, “Accounting
for Stock-Based Compensation”.
 
 The
following table illustrated the effect on net income if the fair-value-based
method had been applied to all outstanding and unvested awards in each
period.
 
 2004
    
    2003
    
    2002Net
      income, as reported
    
    $
    1,661,156
    
    $
    1,320,263
    
    $
    3,194,385Add:      
      Stock-based compensation related to option repricing
    
    
    62,025
    
    
    92,000
    
    
    -Deduct: 
      Total stock-based employee compensation determined under fair-value-based
      method for all awards
    
    
    -
    
    
    (26,000
    )
    
    (22,164
    )Pro
      forma
    
    $
    1,723,181
    
    $
    1,386,263
    
    $
    3,172,221Basic
      net incomeper
      common shareAs
      reported
    
    $
    .49
    
    $
    .67
    
    $
    1.99Pro
      forma
    
    $
    .51
    
    $
    .70
    
    $
    1.98Diluted
      net incomeper
      common shareAs
      reported
    
    $
    .36
    
    $
    .38
    
    $
    1.99Pro
      forma
    
    $
    .38
    
    $
    .40
    
    $
    1.98
  F-11
  
 COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 In
calculating the above stock-based employee compensation for 2003 determined
under the fair-value based method for all awards granted, the Company utilized
the following assumptions; expected volatility of 4.88%, expected life of 10
years, risk free interest rate of 3.18% and dividend yield of 0%.
 
 In
calculating the above stock-based employee compensation for 2002 determined
under the fair-value based method for all awards granted, the Company utilized
the following assumptions; expected volatility of 86.5%, expected life of 10
years, risk free interest rate of 6.2% and dividend yield of 0%.
 
 (k)
    Comprehensive
      Income (Loss)
 
 The
Company has no items of other comprehensive income (loss); therefore, there is
no difference between the Company’s comprehensive income (loss) and net income
(loss) for the periods presented.
 
 (l)
    Investment
      Securities
 
 The
Company maintained investments in its equity securities, which had been
classified as trading securities, for the deferred compensation plan that was
discontinued in 2002 (note 13(b)). Trading securities were bought and held
principally for the purpose of selling them in the near term. Trading securities
are recorded at fair value. Unrealized holding gains and losses on trading
securities are included in earnings. Dividend and interest income are recognized
when earned.
 
 (m)
    Net
      Income (Loss) Per Common Share
 
 Basic
income (loss) per share excludes any dilution. It is based upon the weighted
average number of common shares outstanding during the period. Dilutive earnings
per share reflect the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Dilutive net income (loss) per common share for 2002 is the same as basic net
loss per common share due to the antidilutive effect of the assumed conversion
of preferred shares and exercise of stock options.
 
 (n)
    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.
  F-12
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 The
Company records a valuation allowance against any portion of the deferred income
tax asset when it believes, based on the weight of available evidence, it is
more likely than not that some portion of the deferred tax asset will not be
realized.
 
 (o)
    Impairment
      of Long-Lived Assets and Long-Lived Assets to Be Disposed
      Of
 
 Long-lived
assets, such as intangible assets, furniture, equipment and leasehold
improvements, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value.
 
 (p)
    Use
      of Estimates
 
 The
preparation of the financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
 
 (q)
    Recent
      Issued Accounting Pronouncements
 
 In
December 2003, the Financial Accounting Standards Board issued FASB
Interpretation Number 46-R "Consolidation of Variable Interest Entities." "FIN
46-R, which modifies certain provisions and effective dates of FIN 46, sets
forth criteria to be used in determining whether an investment is a variable
interest entity should be consolidated. These provisions are based on the
general premise that if a company controls another entity through interests
other than voting interests, that company should consolidate the controlled
entity. The Company believes that currently, it does not have any material
arrangements that meet the definition of a variable interest entity, which would
require consolidation.
 
 In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires an entity to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant date fair value of the award. This eliminates the
exception to account for such awards using the intrinsic method previously
allowable under APB Opinion No. 25. SFAS No. 123 (R) will be effective for the
interim period beginning July 1, 2005. The Company is in the process of
evaluating the impact to its financial statements and believes the adoption will
not have a material effect on our income statement.
 
 In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for Nonmonetary transactions."
The amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged.
  F-13
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 Further,
the amendments eliminate the narrow exception for nonmonetary exchanges of
similar productive assets and replace it with a broader exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This statement
shall be applied prospectively and is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier application
is permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The Company does not anticipate that the
adoption of SFAS No. 153 will have a significant impact on the Company's overall
results of operations or financial position.
 
 (2)
    Business
      Acquisitions and Discontinued Operations
 
 (a)
    RAL
      Acquisition
 
 On
September 30, 2003, RAL Purchasing, Inc., a newly formed, wholly owned
Subsidiary of the Company, purchased substantially all of the assets and assumed
certain liabilities of RAL for a price of $2,447,061. The purchase was financed
as follows:
 
 Borrowings
      on the Company’s credit facility
    
    $
    2,147,0615-Year
      unsecured notes issued by RAL Purchasing, Inc. to third parties, at annual
      rate of 9%
    
    
    300,000Total
      outlay
    
    $
    2,447,061
 
 In
connection with this acquisition, the Company’s limit on its credit facility was
increased by $1,500,000 to $13,500,000. All borrowings under the credit facility
are collateralized by substantially all of the assets of the Company. In
addition, the 5-year notes are guaranteed by the Company.
 
 The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition, September 30, 2003:
 
 Current
      assets
    
    $
    3,000,430Property,
      plant and equipment
    
    
    738,092Goodwill
    
    
    211,204Covenant
      not to compete
    
    
    10,000Total
      assets acquired
    
    
    3,959,726Current
      liabilities assumed
    
    
    1,512,665Net
      assets acquired
    
    $
    2,447,061
  F-14
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 Presented
below are the pro forma financial results (unaudited) prepared under the
assumption that the acquisition of RAL had been completed at the beginning of
2002.
 
 (Unaudited)(in
      000’s except for EPS data)
    
    For
      The Year EndedDecember
      31, 2003
    
    For
      the Year EndedDecember
      31, 2002Net
      Sales
    
    $
    51,657
    
    $
    48,569Operating
      Income
    
    
    1,741
    
    
    600Net
      Income From Continuing Operations
    
    
    1,631
    
    
    98Earnings
      Per Share From Continuing OperationsBasic
    
    $
    .83
    
    $
    .06Diluted
    
    $
    .47
    
    $
    .03
 
 RAL is a
distributor of heating and cooling equipment and high-end plumbing fixtures with
six locations, servicing Orange, Rockland, Ulster and Sullivan counties in New
York. Four locations have showrooms. RAL’s products are marketed primarily to
contractors, consumers, builders and the commercial sector.
 
 As a
result of the acquisition, the Company is expecting to be one of the leading distributors
of heating and cooling equipment and high-end plumbing fixtures in its market.
 
 (b)
    In
      July 2002, Universal paid $670,981 to acquire certain accounts receivable,
      inventory and other items from Goldman Associates of New York, Inc.
      (“Goldman”), relating to Goldman’s HVAC business in New Jersey and certain
      areas ofNew
      York. $570,981 of the purchase price was allocated to the above listed
      assets at their estimated fair values. The remaining $100,000 was recorded
      as goodwill and will be tested annually for impairment under the
      provisions of SFAS 142. Pro forma results of operations are not provided
      as the information is not material to the consolidated financial
      statements.
 
 (c)
    On
      January 28, 2002, Atlantic, a wholly-owned Subsidiary of the Company,
      filed a voluntary petition with the U. S. Bankruptcy Court for the Eastern
      District of New York to reorganize under Chapter 11 of the U. S.
      Bankruptcy Code. The proceeding is still on-going. Neither Colonial, nor
      Universal, is part of the Chapter 11 filing. The Company does not believe
      that Atlantic will emerge from the reorganization with any value for the
      Company. The Company does not exercise significant influence over
      Atlantic’s operations and financial activities, and, accordingly, as of
      December 31, 2001, Atlantic has been unconsolidated on the Company’s
      financial statements and its operations are being reported as “income
      (loss) from operations of discontinued segments.” The losses from
      operations of Atlantic for the year ended December 31, 2001 and for the
      period up to January 28, 2002, the date of filing for Chapter 11, were
      $5,553,904 and $544,119, respectively. These losses total $6,098,023 and
      were reported as a net loss from operation of a discontinued operation at
      December 31, 2001. This loss includes $3,439,366 of net losses recorded as
      a result of writing down Atlantic’s assets to their net realizable value
      in order to arrive at the appropriate cost value of the Company’s
      investment in Atlantic. Atlantic’s sales totaled $24,561,972 for the year
      ended December 31, 2001 and for the period up to January 28, 2002 and are
      not included in sales as reported in the consolidated statement of
      operations.
  F-15
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
  On
November 21, 2002, the Company was released from its guarantees of the
indebtedness (approximately $5,800,000) of Atlantic by Atlantic’s lending bank,
in return for the agreement by the Company to pay to the bank $2,500,000 as a
five-year term loan under the Company’s line of credit with the bank, or, if
earlier, on demand by the bank. The $3,300,000 difference between the total
amount previously guaranteed ($5,800,000) and the amount the Company agreed to
pay ($2,500,000) is reflected in the Company’s 2002 statement of operations as
income from the operations of discontinued segments.
 
 The
Company’s investment in Atlantic’s common stock was recognized at a cost value
of $219,007 of guaranteed liabilities as of December 31, 2002. The Company
recognized liabilities of Atlantic only to the extent such liabilities are
guaranteed by the Company because the Company believes that it is not
responsible for any other liabilities of Atlantic as Atlantic’s creditors will
be able to look only to Atlantic’s assets for recovery. Colonial recognized the
$219,007 of guaranteed liabilities of Atlantic until they were extinguished by
Atlantic’s bankruptcy proceedings or otherwise. This liability was settled in
June 2004.
 
 Since the
Company was treating Atlantic as an unconsolidated Subsidiary, Atlantic was
being carried at cost on the Company’s balance sheet until June 2004. As such,
the Company has not reflected any of Atlantic’s 2002 financial activity in its
consolidated financial statements, except for the $3,300,695 release of
guarantee, as stated above. The following summarized financial information for
the deconsolidated Subsidiary, Atlantic, includes the actual 2002
activity:
 
 For
      the year ended December 31,2002Net
      sales
    
    $
    2,700,174Net
      (loss)
    
    $
    (1,712,197
    )
 
 December
      31, 2002Current
      assets (primarily accounts receivable and inventory)
    
    $
    1,920,563Current
      liabilities (primarily accounts payable, accrued
    liabilities)
    
    
    (3,487,946
    )Net
      liabilities of deconsolidated subsidiary
    
    $
    (1,567,383
    )
  F-16
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 (3)
    Property
      and Equipment
 
 Property
and equipment consists of the following at December 31:
 
 2004
    
    2003Computer
      hardware and software
    
    $
    678,737
    
    $
    479,190Furniture
      and fixtures
    
    
    67,015
    
    
    126,667Leasehold
      improvements
    
    
    1,249,954
    
    
    1,121,826Automobiles
    
    
    498,025
    
    
    476,3302,493,731
    
    
    2,204,013Less
      accumulated depreciation and amortization
    
    
    837,582
    
    
    688,882$
    1,656,149
    
    $
    1,515,131
 
 (4)
    Other
      Intangible Assets
 
 The
Company has certain identifiable intangible assets that are subject to
amortization. Intangible assets are included in “Other Intangibles” in the
consolidated balance sheets. The components of intangible assets are as
follows:
 
 December
      31, 2004
    
    December
      31, 2003EstimatedGross
    
    
    
    Net
    
    Gross
    
    
    
    Net
    
    UsefulCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    Carrying
    
    LifeAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    Amount
    
    (Years)Convenants
      Not To Compete
    
    $
    241,667
    
    $
    (214,167
    )
    $
    27,500
    
    $
    241,667
    
    $
    (187,500
    )
    $
    54,167
    
    
    5
 
 Amortization
expense amounted to $26,667, $41,666 and $42,900 for the years ended December
31, 2004, 2003 and 2002, respectively.
 
 Estimated
Amortization Expense
 
 For
      the Years Ended December 31,2005
    
    $
    14,3332006
    
    
    8,5002007
    
    
    2,6672008
    
    
    2,000$
    27,500
 
 (5)
    Financing
      Arrangements
 
 On
November 21, 2002, the Company was released from its guarantees of the
indebtedness (approximately $5,800,000) by Atlantic to Colonial’s and Atlantic’s
lending bank, in return for the agreement by the Company to pay to the bank
$2,500,000 as a five-year term loan under the Company’s line of credit with the
bank, or, if earlier, on demand by the bank. The balance of this credit facility
was paid in full pursuant to a replacement credit facility executed on July 29,
2004.
  F-17
  
 COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 In
connection with the RAL acquisition in September 2003, the Company’s limit on
its credit facility was increased by $1,500,000 to $13,500,000. The balance of
this facility was paid in full, pursuant to a credit facility executed, on July
29, 2004. The facility expires November 21, 2005, but all loans are in any event
due at any time on demand by the bank, and, accordingly, had been classified as
current liabilities. All loans were collateralized by the assets of the Company,
as well as a pledge of all of the outstanding stock of Universal. The facility
contained covenants relating to the financial condition of the Company and its
business operations, and restricted the payment of dividends and capital
expenditures. At December 31, 2003, the Company was in default of the tax
covenant with the bank because it had not filed its 2002 tax returns and the
Company was in default of the capital expenditures covenant for exceeding its
limit during 2003. The bank had waived these events of default.
 
 On July
29, 2004, the Company completed a $15,000,000 secured loan facility with Wells
Fargo Business Credit, Inc. (“WFBCI”) consisting of a revolving line of credit
including a $2,000,000 two-year term loan. This represents a $1,500,000 increase
from its previous line of credit. The revolving credit line bears interest at
..25% below prime, a decrease of 75 basis points from its previous line of
credit, and the term loan bears interest at .50% above prime, a decrease of 200
basis points from its previous line of credit. Substantially all of the assets
of the Company, as well as a pledge of the stock of Colonial’s operating
subsidiaries, collateralize all loans. The facility contains covenants relating
to the financial condition of the Company and its business operations and
restricts the payment of dividends, subordinated debt, purchase of securities
and capital expenditures ($550,000 per year). The Company must maintain a
tangible net worth of approximately $1.5 million for the fiscal quarter ending
December 31, 2004. In addition, the Company is required to maintain certain
levels of net income and cash flows, as defined in the agreement. Availability
under the revolving credit line is determined by a percentage of eligible assets
as defined in the agreement. The Company used approximately $12,865,000 of the
proceeds of this facility to repay its previous senior lender and will use the
balance for additional working capital.
 
 At
December 31, 2004, amounts outstanding under the credit facility were
$12,325,209, of which $1,666,667 represents a term loan payable in 20 remaining
equal monthly installments of approximately $83,333. Although the term loan is
payable over a specified period, 20 months, the Bank can demand payment at any
time. At December 31, 2004, the amount of the unused available credit was
$1,247,040. The interest rate on the $1,666,667 term loan was 5.75% (prime plus
..5%) as of December 31, 2004. The interest rate on the remaining credit
facility, as of December 31, 2004 was 5.0% (prime minus .25%). In the event that
Mr. Pagano no longer performs the duties of President of Universal or Vice
President of RAL or American/Universal for any reason other than because of his
death or disability, the Company will be considered in default of its credit
agreement with WFBCI unless a waiver is obtained.
  F-18
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 (6)
    Notes
      Payable
 
 (a)
    Notes
      payable consist of the following at December
31:
 
 2004
    
    2003Various
      term notes payable to a bank, (collateralized by the equipment purchased)
      with aggregate monthly principal and interest installments of $4,019,
      bearing interest at between .9% to 5.9%
    
    $
    170,914
    
    $
    130,905Term
      note payable to a private individual, $30,000 annual principal payment,
      interest at 9% payable monthly.*
    
    
    120,000
    
    
    150,000Term
      note payable to an investment company, $30,000 annual principal payments,
      interest at 9% payable monthly
    
    
    120,000
    
    
    150,000Term
      notes payable to private investors, subordinated unsecured convertible
      notes payable, bearing interest at 11% per annum, interest payable
      quarterly, with 50% of the principal payable on June 1, 2008 and the
      balance on June 1, 2009. The notes are convertible into 175,000 shares of
      common stock at $3.00 per share during the term of the
      notes.**
    
    
    525,000
    
    
    -Term
      note payable of $750,000 to corporation, subordinated secured note
      payable, bearing interest at the prime rate and payable quarterly,
      principal payable on June 30, 2008 and warrants to purchase 150,000 shares
      of common stock at $3.00 per share expiring June 30, 2008. The warrant was
      initially recorded at a fair value of $187,500 and recorded as a discount
      from the face value of the note and an increase to additional paid in
      capital. The discount is being accredited over the term of the note as
      additional interest expense. The Company recorded $15,625 in interest
      expense during 2004 related to the warrant.***
    
    
    578,125
    
    
    -1,514,039
    
    
    430,905Less
      current installments
    
    
    115,265
    
    
    104,205$
    1,398,774
    
    $
    326,700
 
 *The term
note payable bearing interest at 9% is to Paul Hildebrandt, who at December 31,
2004 was a director of the company.
 
 **Included
in the above term note payable bearing interest at 11%, are five notes
considered to be related party transactions; $100,000 term note payable to
William Pagano, President of Universal and Director of the Company, $50,000 term
note payable to William Salek, Chief Financial
Officer and Secretary of the Company, $100,000 term note payable to Rita Folger,
beneficial owner of greater than 5% of the Company, $25,000 term note payable to
Eileen Goldman, the wife of Michael Goldman and $50,000 term note payable to
Paul Hildebrandt.
  F-19
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
  ***The
term note payable bearing interest at prime rate is to Goldman Associates of NY,
Inc., in which Michael Goldman is President, is also considered a related party.
Pursuant to the Private Placement Agreement, Goldman Associates agreed that it
and its affiliates will not until May 31, 2008 without the prior written consent
of the Board of Directors of the Company (i) acquire, agree to acquire or make
any proposal to acquire any voting securities or assets of the Company or any of
its affiliates, (ii) propose to enter into any merger, consolidation,
recapitalization, business combination, or other similar transaction involving
the Company or any of its affiliates, (iii) make, or in any way participate in
any “solicitation” of “proxies” (as such terms are used in the proxy rules of
the Securities and Exchange Commission) to vote or seek to advise or influence
any person with respect to the voting of any voting securities of the Company or
any of its affiliates or (iv) form, join or in any way participate in a “group”
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, in connection with any of the foregoing or (v) advise, assist or
encourage any other persons in connection with the foregoing.
 
 Maturities
      of notes payable are as follows:2005
    
    $
    115,2652006
    
    
    107,5582007
    
    
    100,7172008
    
    
    921,6522009
    
    
    268,847$
    1,514,039
 
 (b)
    During
      the years ended December 31, 2003 and 2002, $91,885 and $94,477,
      respectively, of the unclaimed payments on notes payable were recorded as
      other income in the accompanying consolidated statements of operations.
 
 (7)
    Capital
      Stock
 
 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 shares contain a liquidation preference provision
entitling the holder to receive payments equaling $5.00 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. If 600,000 or less preferred shares are outstanding, all 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 directors vote together on all other matters.
  F-20
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 At
December 31, 2004, there were 2,315,439 shares of common stock reserved for
conversion of preferred stock and for the exercise of stock options, convertible
notes and warrants (note 8).
 
 Messrs.
Goldman, Korn, Pagano, Rozzi, and Ms. Folger each signed a stock purchase and
sale standstill agreement in which they agreed until May 31, 2008 not to
purchase any stock without written consent from the Company and they will not
sell any stock to anyone when such a sale would create a new 5% shareholder
unless such person first enters into a similar standstill
agreement.
 
 (8)
    Stock
      Options
 
 In June
1996, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”) pursuant
to which, as amended, 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 (non-employees) to the Company. Under the 1996 Plan, the options can be
either incentive or nonqualified. The vesting period 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.
 
 At
December 31, 2004, a total of 194,000 options were outstanding under the
Company’s 1996 Stock Option Plan, which expires on December 31, 2006.
 
 Changes
in options outstanding are as follows:
 
 Shares
      Subjectto
      Option
    
    Weighted
      AverageExercise
      PriceBalance
      at December 31, 2001
    
    
    333,000
    
    
    2.66Cancelled
    
    
    (30,000
    )
    
    2.30Expired
    
    
    (70,000
    )
    
    1.50Balance
      at December 31, 2002
    
    
    233,000
    
    
    3.06Expired
    
    
    (91,500
    )
    
    2.25Granted
    
    
    104,000
    
    
    .25Balance
      at December 31, 2003
    
    
    245,500
    
    
    .25Options
      Exercised
    
    
    (51,500
    )
    
    .25Balance
      at December 31, 2004
    
    
    194,000
    
    
    .25
  F-21
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 On
February 11, 2003, 141,500 outstanding stock options were repriced to an
exercise price of $.25, the fair market value on that date. The repricing caused
the Company to incur additional stock-based compensation expense of $62,025 and
$92,000 for the years ended December 31, 2004 and 2003,
respectively.
 
 The
following table summarizes information about stock options at December 31,
2004:
 
 Options
      Outstanding and ExercisableRange
      ofExercise
      Prices
    Shares
    Weighted-Average
      RemainingContractual
      Life
    Weighted-Average
      ExercisePrice$
      .25
    194,000
    5.99
    $
      .25
 
 (9)
    Net
      Income Per Common Share
 
 Basic net
income per share is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding. Diluted earnings
per share reflect, in periods in which they have a dilutive effect, the impact
of common shares issuable upon exercise of stock options.
 
 A
reconciliation between the numerators and denominators of the basic and diluted
income per common share is as follows:
 
 2004
    
    2003
    
    2002Net
      income (numerator)
    
    $
    1,661,156
    
    $
    1,320,263
    
    $
    3,194,385Weighted
      average common shares (denominator for basic income per
    share)
    
    
    3,403,152
    
    
    1,971,129
    
    
    1,603,777Effect
      of dilutive securities:Convertible
      preferred stock
    
    
    918,778
    
    
    1,466,792
    
    
    -Convertible
      notes
    
    
    72,931
    
    
    -
    
    
    -Employee
      stock options
    
    
    193,105
    
    
    63,777
    
    
    -Weighted
      average common andpotential
      common sharesoutstanding
      (denominator fordiluted
      income (loss) per share)
    
    
    4,587,966
    
    
    3,501,698
    
    
    1,603,777Basic
      net income (loss) per share
    
    $
    .49
    
    $
    .67
    
    $
    1.99Diluted
      net income (loss) per share
    
    $
    .36
    
    $
    .38
    
    $
    1.99
  F-22
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 Employee
stock options totaling 263,700 for the year ended December 31, 2002 were not
included in the net income (loss) per share calculation because their effect
would have been antidilutive. Convertible preferred stock totaling 1,464,269
shares for the year ended December 31, 2002 were not included in the net loss
per share because their effect would have been antidilutive.
 
 (10)
    Income
      Taxes
 
 The
provision for income taxes consists of the following:
 
 2004
    
    2003
    
    2002Federal
    
    State And
      Local
    
    Total
    
    Federal
    
    State And
      Local
    
    Total
    
    Federal
    
    State And
      Local
    
    TotalCurrent
    
    $
    9,000
    
    $
    137,932
    
    $
    146,932
    
    $
    (69,970
    )
    $
    154,214
    
    $
    84,244
    
    
    -
    
    $
    37,167
    
    $
    37,167Deferred
    
    
    (645,600
    )
    
    -
    
    
    (645,600
    )
    
    (421,400
    )
    
    -
    
    
    (421,400
    )
    
    -
    
    
    -
    
    
    -Total
      tax (benefit) expense
    
    $
    (636,600
    )
    $
    137,932
    
    $
    (498,668
    )
    $
    (491,370
    )
    $
    154,214
    
    $
    (337,156
    )
    
    -
    
    $
    37,167
    
    $
    37,167
 
 The
components of deferred income tax (benefit) expense on continuing operations
attributable to income (loss) on continuing operations are as
follows:
  2004
    
    2003
    
    2002Deferred
      tax expense (benefit), exclusive of the effects of the other components
      listed below
    
    $
    -
    
    $
    -
    
    $
    (1,382
    )Increase
      (decrease) in beginning-of-the-year balance of the valuation allowance for
      deferred tax assets
    
    
    (645,600
    )
    
    (421,400
    )
    
    32,557Generation
      of continuing operations net operating loss carryforward
    
    
    -
    
    
    -
    
    
    (31,175
    )$
    (645,600
    )
    $
    (421,400
    )
    $
    -
 A
reconciliation of the provision for income taxes attributable to income (loss)
on continuing operations computed at the Federal statutory rate to the reported
provision for income taxes follows:
 
 2004
    
    2003
    
    2002Tax
      provision at Federal statutory rate
    
    
    34.0
    %
    
    34.0
    %
    
    34.0
    %State
      income taxes, net of federal benefit
    
    
    6.0
    %
    
    6.0
    %
    
    (35.5
    )%Benefit
      from Alternative Minimum Tax carryback refund
    
    
    0.0
    %
    
    (9.0
    )%
    
    0.0
    %Change
      in valuation allowance for deferred tax assets
    
    
    (83.7
    )%
    
    (65.3
    )%
    
    (37.9
    )%Permanent
      differences
    
    
    0.0
    %
    
    0.0
    %
    
    (14.4
    )%Other
    
    
    0.8
    %
    
    0.0
    %
    
    0.0
    %Total
    
    
    (42.9
    )%
    
    (34.3
    )%
    
    (53.8
    )%
  F-23
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2004 and 2003 are presented
below.
 
 2004
    
    2003Current
      Deferred Tax Assets:Federal
      net operating loss carryforwards
    
    $
    574,061
    
    $
    421,400Current
      Deferred Tax Assets
    
    $
    574,061
    
    $
    421,400Non-current
      Deferred Tax Assets:Federal
      net operating loss carryforwards
    
    $
    13,585,090
    
    $
    10,567,740State
      net operating loss carryforwards
    
    
    138,789
    
    
    178,529Allowance
      for doubtful accounts
    
    
    98,752
    
    
    111,150Additional
      costs inventoried for tax purposes
    
    
    376,730
    
    
    485,919Alternative
      Minimum Tax Credit Carryforward
    
    
    -
    
    
    21,786Goodwill
    
    
    -
    
    
    577,259Non-current
      Deferred Tax Assets
    
    
    14,199,361
    
    
    11,942,383Non-current
      Deferred Tax Liabilities:Goodwill
    
    
    (138,111
    )
    
    -Depreciation
    
    
    (29,722
    )
    
    (7,643
    )Non-current
      Deferred Tax Liabilities
    
    
    (167,833
    )
    
    (7,643
    )Non-current
      Deferred Tax Assets
    
    
    14,031,528
    
    
    11,934,740Less
      Valuation Allowance
    
    
    (13,538,589
    )
    
    (11,934,740
    )Net
      Non-Current Deferred Tax Assets
    
    $
    492,939
    
    $
    -
 
 As of
December 31, 2003 gross deferred tax assets in the amount of $12,363,783 were
reduced by a valuation allowance in the amount of $11,934,740. Such valuation
allowance had been reduced by $792,469 during the year ending December 31, 2003,
to reflect management’s then assessment of the likelihood of utilizing net
operating losses in the future, based upon improved results of operations during
2003 and upon projections of future taxable income.
 
 In July
2004, the Company entered into a new financing agreement along with two private
placements. The combination of the private placements and debts financing
provided an additional $4,050,000 in liquidity. It is management’s opinion that
this additional liquidity will allow the Company to expand inventory levels
while taking advantage of purchase discounts and programs. Management believes
that this will ultimately result in increased revenues and gross margin
percentages. Therefore, management has adjusted its future income projections as
a result of these events and has reduced its valuation allowance by
approximately $973,000.
 
 During
the years ended December 31, 2004 and 2003, the valuation allowance was
increased by $1,603,849 and decreased by $792,469, respectively.
 
 At
December 31, 2004, the Company’s operating loss carryforwards for federal income
tax purposes of approximately $41,645,000. Varying amounts of the net operating
loss carryforwards will expire from 2005 through 2022.
  F-24
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 Expiration
      Year
    
    Net
      Operating Losses2005
    
    $
    8,245,0002006
    
    
    4,811,0002007
    
    
    4,945,0002008
    
    
    415,0002020
    
    
    5,960,0002021
    
    
    2,737,0002022
    
    
    14,532,000$
    41,645,000
 
 The
utilization of the net operating loss carryforwards is subject to certain annual
limitations. 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.
 
 (11)
    Fair
      Value of Financial Instruments
 
 Statement
of Financial Accounting Standards No.107, “Disclosures 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 payable, because of the short term nature of
these instruments.
 
 The fair
value of long-term debt is based on current rates at which the Company could
borrow funds with similar remaining maturities.
 
 (12)
    Supplemental
      Cash Flow Information
 
 The
following is supplemental information relating to the consolidated statements of
cash flows:
 
 2004
    
    2003
    
    2002Cash
      paid during the years for:Interest
    
    $
    852,288
    
    $
    543,646
    
    $
    511,324Income
      taxes
    
    $
    173,665
    
    $
    102,900
    
    $
    23,024
 
 Non-cash
transactions:
 
 During
2004, 2003 and 2002, 83,623, -0- and 34 shares, respectively, of convertible
preferred stock were converted to a similar number of common
shares.
 
 During
2003 notes payable of $300,000 were incurred relating to the acquisition of
RAL.
  F-25
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 (13)
    Employee
      Benefit Plans
 
 (a)
    401(k)
      Plan
 
 The
Company has a 401(k) plan, which covers substantially all employees.
Participants in the plan may contribute a percentage of compensation, but not in
excess of the maximum allowed under the Internal Revenue Code. The plan provides
for matching contributions. In 2004, 2003 and 2002, $169,319, $137,508 and
$111,793, respectively, of contributions were made to the plan.
 
 (b)
    Deferred
      Compensation Plan
 
 During
fiscal 1999, Universal adopted a Deferred Compensation Plan (the Plan) for a
select group of management employees. The Plan was intended to provide certain
executives with supplemental retirement benefits, as well as to permit the
deferral of more of their compensation than they are permitted to defer under
the 401(k) plan. The plan provided for a contribution equal to 5% of a
participant’s compensation to be made to the plan for those participants who are
employed as of December 31. The plan was not intended to be a qualified plan
under the provisions of the Internal Revenue Code. All compensation deferred
under the plan was held by the company in an investment trust, which was
considered an asset of the Company. The return on these underlying investments
determined the amount of earnings credited to the employees. As was allowed
under the plan, the Company terminated the plan during 2002. The proceeds of the
plan investments were paid out to the plan participants.
 
 (14)
    Business
      and Credit Concentrations
 
 Universal
purchases products from primarily 450 suppliers. In 2004, two suppliers
accounted for 38% 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.
In 2003 and 2002, two suppliers accounted for 47% and 49.1% of Universal’s
purchases, respectively.
 
 (15)
    Commitments
 
 (a)
    Compensation
 
 The
Company has employment contracts with two officers and various employees with
remaining terms ranging from one to four years. The amounts due under these
contracts are $680,000, $530,000, $425,000 and $200,000 in the years ended
December 31, 2005, 2006, 2007 and 2008, respectively. These commitments do not
include amounts that may be earned as a bonus.
  F-26
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 (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 $2,705,911, $1,404,475 and $1,153,867 for the years ended December 31, 2004,
2003 and 2002, respectively. At December 31, 2004, future minimum lease payments
in the aggregate and for each of the five succeeding years are as
follows:
 
 2005
    
    $
    2,720,0012006
    
    
    2,582,7912007
    
    
    2,369,0122008
    
    
    1,856,0122009
    
    
    834,078Thereafter
    
    
    1,693,092Total
    
    $
    12,054,986
 
 (c
      )
    Private
      Placement
 
 On July
30, 2004, the Company completed a private placement with Michael Goldman and
Goldman Associates of New York, Inc. pursuant to Regulation D of the Securities
Exchange Act of 1933. For total consideration of $1,500,000, the Company issued
to Goldman Associates of New York, Inc. 600,000 shares of common stock at $1.25
per share, a $750,000 subordinated secured note payable, earning interest at the
prime rate, interest payable quarterly, principal payable June 30, 2008, and
warrants to purchase 150,000 shares of common stock at $3.00 per share expiring
June 30, 2008. The $187,500 estimated value of the warrants was accounted for as
an increase to additional paid in capital and as a discount to the note
payable.
 
 On July
29, 2004, the Company completed a private placement, pursuant to Regulation D of
the Securities Exchange Act of 1933. The Company raised $1,050,000 through the
issuance of 420,000 shares of common stock at $1.25 per share and the issuance
of $525,000 of subordinated unsecured convertible notes payable (“Notes”),
bearing interest at 11% per annum, interest payable quarterly, with 50% of the
principal payable on June 1, 2008 and the balance on June 1, 2009. The Notes are
convertible into 175,000 shares of common stock at $3.00 per share during the
term of the Notes.
 
 On
February 12, 2004, the Company completed a private placement, pursuant to
Regulation D of the Securities Act of 1933. The Company raised $360,000 through
the issuance of 600,000 shares of common stock at $0.60 per share. Bernard Korn
(Chairman and President of the Company), purchased 165,000 shares, William
Pagano (Director of the Company and President of Universal, purchased 165,000
shares, Michael Goldman (appointed Director of the Company on September 29,
2004) purchased 170,000 shares and Rita Folger (a private investor, who owned
9.42% of the Company as of that date), purchased 100,000 shares.
  F-27
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 The
Company has used substantially all of the proceeds from the February 12, 2004
private placement to purchase 592,730 shares of escheated convertible preferred
stock at $0.60 per share from the State of Ohio. The Company has retired these
convertible preferred shares.
 
 The stock
from the private placement cannot be sold, transferred or otherwise disposed of,
unless subsequently registered under the Securities Act of 1933 and applicable
state or Blue Sky laws, or pursuant to an exemption from such registration,
which is available at the time of desired sale, and bears a legend to that
effect.
 
 On July
16, 2003, the Company completed a private placement, pursuant to Regulation D of
the Securities Exchange Act of 1933. The Company raised $240,600 through the
issuance of 802,000 shares of common stock at $0.30 per share, as determined by
the Board of Directors. Bernard Korn (Chairman and President of the Company),
purchased 167,000 shares, James W. Stewart (who was Executive Vice President and
Director of the Company as of July 16, 2003) purchased 100,000 shares, William
Pagano (Director of the Company and President of the Universal, purchased
335,000 shares, Jack Rose (Director of the Company), purchased 50,000 shares and
Rita Folger (a private investor who owned 6.86% of the Company as of that date),
purchased 150,000 shares. The proceeds of the private placement will be used for
general working capital purposes. The stock cannot be sold, transferred or
otherwise disposed of, unless subsequently registered under the Securities Act
of 1933 and applicable state or Blue Sky laws, or pursuant to an exemption from
such registration, which is available at the time of desired sale, and will bear
a legend to that effect.
 
 (16)
    Litigation
 
 The
Company’s Universal Supply Group, Inc. Subsidiary is a New York corporation
(“Universal”). In June 1999, Universal acquired substantially all of the assets
of Universal Engineering Co., Inc. and Universal Supply Group, Inc., a New
Jersey corporation, including its name. The name of Universal Supply Group, Inc.
(the selling corporation) was subsequently changed to Hilco, Inc. In 1998,
Hilco, Inc. acquired the assets of Amber Supply Co., Inc., previously known as
Amber Oil Burner Supply Co., Inc. Universal Engineering Co., Inc., Amber Supply
Co., Inc., Amber Oil Burner Supply Co., Inc. and Hilco, Inc. are referred to as
the “Predecessors.” The majority shareholders of the predecessors are John A.
Hildebrandt and Paul Hildebrandt. Paul Hildebrandt was a director of the Company
from September 29, 2004 to January 28, 2005.
 
 Universal
has been joined as a defendant with Predecessors and many other companies in
numerous product liability lawsuits brought in the Superior Court of New Jersey
(Middlesex County) that allege injury due to asbestos. These actions have been
managed by the Predecessor’s historic product liability insurance carriers, and
all claims, including all defense and settlement costs, to date have been
covered and paid by those carriers. Counsel representing the Company in these
matters has advised that they are not aware of any material pending or
threatened litigation, claims or assessments, except for one matter of which any
verdict or settlement will be covered by insurance. John A. Hildebrandt, Paul
Hildebrandt and the Predecessors have also indemnified Universal against all
asbestos claims. The asbestos claims that have been filed to date stem primarily
from products sold by the Predecessors prior to 1999 that were manufactured
and/or packaged by a third party, which allegedly contained asbestos. The
Company does not believe that it will be materially adversely affected by these
lawsuits.
  F-28
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 (17)
    Related
      Party Transactions
 
 The
Company leases a store with a warehouse located in Wharton, New Jersey
comprising of 27,000 square feet from a company owned by Mr. Paul Hildebrandt
under a lease that expires in June 2010. The Company paid Mr. Hildebrandt’s
company $206,097 and $195,030 during the years ended December 31, 2004 and 2003,
respectively.
 
 Oscar
Folger, who is legal counsel for the Company, is the husband of Rita Folger who
is a beneficial owner of the Company. Professional fees paid to the law firm of
Oscar Folger for the years ended 2004, 2003, and 2002 were $71,115, $70,773, and
$20,400, respectively. As of December 31, 2004 and 2003, there are no
outstanding liabilities to Oscar Folger.
 
 On
January 24, 2005, Mr. Pagano executed a contract to purchase certain realty
owned by Zanzi Realty, Inc., located in Fishkill, New York. The aforementioned
realty is under lease agreement with RAL, a wholly owned Subsidiary of the
Company, as a tenant of the premises. On March 7, 2005, Mr. Pagano assigned the
contract to Pioneer
Realty Holdings, LLC, a New York limited liability company. Each of Messrs.
Pagano and Paul Hildebrandt has a 35% interest in this entity. Each of Rita
Folger and Jeffrey Folger has a 4% interest in this entity. Jeffrey Folger is
the son of Oscar and Rita Folger.
 
 See Notes
5, 6 and 7 for additional related party transactions.
 
 (18)
    Quarterly
      Results (Unaudited)
 
 The
following table sets forth selected unaudited quarterly financial data of the
Company for the years ended December 31, 2004 and 2003:
  F-29
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued
 
 QUARTER
      ENDEDMar.
      31,
    
    June
      30,
    
    Sept.
      30,
    
    Dec.
      31,(Dollars
      in thousand, except per share data)2004Net
      sales
    
    $
    12,525
    
    $
    16,149
    
    $
    16,185
    
    $
    16,595Gross
      profit
    
    
    3,810
    
    
    4,798
    
    
    4,731
    
    
    5,045Net
      income (loss)
    
    
    (299
    )
    
    664
    
    
    839
    
    
    457Income
      (loss) per common share:Basic:Net
      income (loss)
    
    
    (0.11
    )
    
    .22
    
    
    .22
    
    
    .11Diluted:Net
      income (loss)
    
    
    (0.11
    )
    
    .16
    
    
    .17
    
    
    .092003Net
      sales
    
    $
    8,357
    
    $
    10,690
    
    $
    11,322
    
    $
    14,302Gross
      profit
    
    
    2,465
    
    
    2,998
    
    
    3,224
    
    
    4,479Net
      income (loss)
    
    
    (69
    )
    
    181
    
    
    325
    
    
    883Income
      (loss) per common share:Basic:Net
      income (loss)
    
    
    (0.04
    )
    
    .11
    
    
    .14
    
    
    .37Diluted:Net
      income (loss)
    
    
    (0.04
    )
    
    .06
    
    
    .08
    
    
    .22
  F-30
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The Board
of Directors and Stockholders
 of
Colonial Commercial Corp.:
 
 Under the
date of October 2, 2003, we reported on the consolidated statements of
operations, stockholders’ equity (deficit) and cash flows of Colonial Commercial
Corp. and Subsidiaries for the year ended December 31, 2002, which are included
in the Company’s 2004 annual report on Form 10-K. In connection with our audit
of the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule in the 2004 annual report on
Form 10-K as it pertains to the year ended December 31, 2002. This consolidated
financial statement schedule is the responsibility of the Company’s management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audit.
 
 In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole presents fairly, in all
material respects, the information set forth therein. The audit report on the
consolidated financial statements of Colonial Commercial Corp. and Subsidiaries
referred to above contains an explanatory paragraph that states that the Company
has had losses in 2001 and 2000, has stockholders’ deficit at December 31, 2002
and has negative working capital. In addition, outstanding borrowings under its
credit facility are due on demand. If the bank were to demand repayment, the
Company does not project that it would have sufficient liquidity to make such a
payment. In addition, as discussed in note 2(c), Atlantic Hardware & Supply
Corporation (“Atlantic”), a wholly owned Subsidiary of the Company, filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on January
28, 2002. The financial results of Atlantic have been deconsolidated and the
Company accounts for Atlantic using the cost method. These circumstances raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 1 (c)
paragraphs 2 and 3. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
 
 /s/
KPMG LLP
 KPMG
LLP
 
 Melville,
New York
 October
2, 2003
  F-31
  Schedule II
 
 Colonial
Commercial Corp. and Subsidiaries
 
 Schedule
of Valuation and Qualifying Accounts
 
 AdditionsDescription
    
    Balance
      at Beginningof
      Year
    
    Charged
      to Costs andExpenses
    
    Charged
      to OtherAccounts
    
    Deductions
    
    Balance
      atEnd
      of YearFor
      the year ended December 31, 2004 Allowance for doubtful
      accounts
    
    $
    284,829
    
    $
    225,183
    
    $
    14,862
      (a
    )
    $
    (234,426)
      (b
    )
    $
    290,448For
      the year ended December 31, 2003Allowance for doubtful
      accounts
    
    $
    265,211
    
    $
    188,050
    
    $
    14,040
      (a
    )
    $
    (182,472)
      (b
    )
    $
    284,829For
      the year ended December 31, 2002Allowance for doubtful
      accounts
    
    $
    253,156
    
    $
    111,339
    
    $
    19,592
      (a
    )
    $
    (118,876)
      (b
    )
    $
    265,211
 
 (a)
    Comprised
      primarily of accounts that were previously charged against the allowance,
      and have since been collected.
 
 (b)
    Comprised
      primarily of uncollected accounts charged against the
      allowance.
  F-32
  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 KornBernard Korn,
  President
 By:
    /s/ William
SalekChief Financial and Accounting
      Officer
 
 Dated:
April 14, 2005
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
duly signed below on April 14, 2005 by the following persons on behalf of the
Registrant and in the capacities indicated:
  By:
    /s/ E. Bruce
    FredriksonDirector
 By:
    /s/ Melissa
  GoldmanDirector
 By:
    /s/ Michael
  GoldmanDirector
 By:
    /s/ Bernard KornBernard
      Korn, President & Director
 By:
    /s/ William KoonWilliam
      Koon, Director
 By:
    /s/ Ronald MillerRonald
      Miller, Director
 By:
    /s/ William
  PaganoWilliam Pagano,
Director
 By:
    /s/ Jack RoseJack Rose, Director
 ****By:
    /s/ Carl L.
  SussmanCarl
      L. Sussman, Director