Edgar Filing: COLONIAL COMMERCIAL CORP

Colonial Commerical Corporation Form 10-Q 6-30-2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 1-6663

COLONIAL COMMERCIAL CORP.

(Exact name of registrant as specified in its charter)

New York		11-2037182
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

275 Wagaraw Road, Hawthorne, New Jersey		07506
(Address of principal executive offices)		(Zip Code)

973-427-8224

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at August 1, 2006
Common Stock, $.05 par value per share		4,592,256 shares
Convertible Preferred Stock, $.05 par value per share		468,924 shares

COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.		Financial Statements

		Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005	1

		Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2006 and 2005	2

		Condensed Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 2006 and 2005	3

		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2006 and 2005	4

		Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	16

Item 4.		Controls and Procedures	16

PART II.	OTHER INFORMATION

Item 1.		Legal Proceedings	17

Item 4.		Submission of Matters to a Vote of Security Holders	17

Item 6.		Exhibits	17

Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2006			2005
	(Unaudited)
Assets
Current assets:
Cash	$	970,012		$	613,456
Accounts receivable, net of allowance for doubtful accounts of $193,636 2006 and $185,971 in 2005		9,122,694			8,489,717
Inventory		13,666,179			12,214,261
Prepaid expenses and other current assets		993,110			1,066,658
Deferred tax asset - current portion		637,500			637,500
Total current assets		25,389,495			23,021,592
Property and equipment		1,642,971			1,669,484
Goodwill		1,628,133			1,628,133
Other intangibles		4,500			11,334
Other assets - noncurrent		132,679			135,832
Deferred tax asset - noncurrent		1,071,000			1,071,000
	$	29,868,778		$	27,537,375
Liabilities and Stockholders' Equity
Current liabilities:
Trade payables	$	6,089,099		$	5,991,946
Accrued liabilities		2,020,377			2,047,159
Income taxes payable		971			12,772
Borrowings under credit facility - revolving credit		13,562,196			11,183,008
Borrowings under credit facility - term loan/overadvance		562,977			562,977
Notes payable - current portion; includes related party notes of $30,000 in 2006 and $60,389 in 2005		133,395			165,112
Total current liabilities		22,369,015			19,962,974
Notes payable, excluding current portion; includes related party notes of $1,010,000 in 2006 and $1,000,625 in 2005		1,399,452			1,400,834
Total liabilities		23,768,467			21,363,808

Commitments and contingencies
Stockholders' equity:
Redeemable convertible preferred stock, $.05 par value, 2,500,000 shares authorized, 468,924 in 2006 and 484,721 in 2005 shares issued and outstanding, liquidation preference of $2,344,620 in 2006 and $2,423,605 in 2005		23,446			24,236
Common stock, $.05 par value, 20,000,000 shares authorized, 4,592,256 in 2006and 4,544,459 in 2005 shares issued and outstanding		229,613			227,223
Additional paid-in capital		10,633,259			10,626,859
Accumulated deficit		(4,786,007	)		(4,704,751	)
Total stockholders' equity		6,100,311			6,173,567
	$	29,868,778		$	27,537,375

See accompanying notes to unaudited condensed consolidated financial statements.

Contents

COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	For The Three Months Ended
	June 30,
	2006			2005
Sales	$	18,155,812		$	17,501,842
Cost of sales		12,714,879			12,369,723
Gross profit		5,440,933			5,132,119

Selling, general and administrative expenses, net		4,793,206			4,368,437
Operating income		647,727			763,682

Other income		63,467			87,557
Interest expense, net; includes related party interest of $25,765 in 2006 and $22,721 in 2005		(336,240	)		(250,029	)
Income before income taxes		374,954			601,210

Income tax expense		33,121			81,028
Net income	$	341,833		$	520,182

Income per common share:
Basic	$	0.07		$	0.12
Diluted	$	0.06		$	0.10

Weighted average shares outstanding:
Basic		4,579,846			4,185,505
Diluted		5,302,026			5,287,577

See accompanying notes to unaudited condensed consolidated financial statements.

Contents

COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	For The Six Months Ended
	June 30,
	2006			2005
Sales	$	33,040,025		$	30,849,161
Cost of sales		23,012,325			21,463,971
Gross profit		10,027,700			9,385,190

Selling, general and administrative expenses, net		9,550,068			8,619,062
Operating income		477,632			766,128

Other income		129,256			149,435
Interest expense, net; includes related party interest of $51,393 in 2006 and $44,541 in 2005		(635,902	)		(493,590	)
(Loss) income before income taxes		(29,014	)		421,973

Income tax expense		52,242			100,724
Net (loss) income	$	(81,256	)	$	321,249

(Loss) income per common share:
Basic	$	(0.02	)	$	0.08
Diluted	$	(0.02	)	$	0.06

Weighted average shares outstanding:
Basic		4,578,606			4,175,422
Diluted		4,578,606			5,287,377

See accompanying notes to unaudited condensed consolidated financial statements.

Contents

COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For The Six Months Ended
	2006			2005
Cash flows from operating activities:
Net (loss) income	$	(81,256	)	$	321,249
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock-based compensation		-			(25,740	)
Provision for doubtful accounts		84,310			30,587
Depreciation		222,472			191,090
Amortization of intangibles		6,834			9,333
Accretion of debt discount		18,750			18,750
Changes in operating assets and liabilities
Accounts receivable		(717,287	)		(1,020,982	)
Inventory		(1,451,918	)		104,505
Prepaid expenses and other current assets		73,548			(213,282	)
Other assets - noncurrent		3,153			26,942
Trade payables		97,153			452,130
Accrued liabilities		(26,782	)		218,667
Income taxes payable		(11,801	)		56,263
Net cash (used in) provided by operating activities		(1,782,824	)		169,512

Cash flows from investing activities:
Additions to property and equipment		(195,959	)		(141,040	)
Net cash used in investing activities		(195,959	)		(141,040	)

Cash flows from financing activities:
Issuance of common stock and exercise of stock options		8,000			3,500
Repayments of notes payable: includes related party repayments of $30,389 in 2006, and $0.00 in 2005.		(64,922	)		(26,950	)
Issuance of notes payable		13,073			-
Borrowings (repayments) under credit facility - term loan/overadvance		250,000			(250,000	)
Borrowings under credit facility - revolving credit		2,129,188			428,317
Net cash provided by financing activities		2,335,339			154,867
Increase in cash		356,556			183,339
Cash - beginning of year		613,456			310,659
Cash - end of year	$	970,012		$	493,998

See accompanying notes to unaudited condensed consolidated financial statements.

Contents

COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

June 30, 2006

(Unaudited)

1.	Summary of Significant Accounting Policies and Practices

The condensed consolidated financial statements of Colonial Commercial Corp. and Subsidiaries (the "Company") included herein have been prepared by the Company and are unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods to which the report relates. The results of operations for the period ended June 30, 2006 are not necessarily indicative of the operating results that may be achieved for the full year.

Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2005.

We have one continuing industry segment - wholesale distribution of heating, ventilation, air conditioning equipment and plumbing fixtures.

Inventory is comprised of finished goods.

Stock Options

The Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based transactions using APB No. 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated financial statements. SFAS No. 123R requires additional disclosures relating to the income tax and cash flow effects resulting from share-based payments. The Company has adopted the modified prospective application method of SFAS No.123(R), effective January 1, 2006, and the adoption of SFAS No. 123(R) has an immaterial impact on its consolidated results of operations and earnings per share.

The Company recognized stock-based compensation related to option repricing for options previously awarded using the intrinsic-value method. For the quarter and six months ended June 30, 2005, the amount of stock based compensation was $(14,840) and $(25,740), respectively. During the quarter and six months ended June 30, 2006 and 2005, no stock options were granted and all outstanding options were fully vested.

In June 1996, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”) to grant options to key employees and other persons who render service (non-employee) to the Company. The 1996 Plan expired on December 31, 2005.

At June 30, 2006, a total of 74,000 options were outstanding under the 1996 Plan. The outstanding options have expiration dates ranging from 2009 to 2013.

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The following table summarizes information about stock options at June 30, 2006:

Options Outstanding and Exercisable

Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$ .25	74,000	5.54	$ .25

The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding awards in each period.

	For the Quarter Ended June 30, 2005			For the Six Months Ended June 30, 2005

Net income, as reported	$	520,182		$	321,249

Add: Stock-based compensation related to option repricing		(14,840	)		(25,740	)

Pro forma net income	$	505,342		$	295,509

Basic income per share, as reported		0.12			0.08
Basic income per share, pro forma		0.12			0.07

Diluted income per share, as reported		0.10			0.06
Diluted income per share, pro forma		0.10			0.06

2.	Equity Transactions

On April 3, 2006, Ronald Miller obtained 12,000 shares of common stock, by exercising 12,000 outstanding stock options. Mr. Miller is a Director of the Company.

On April 17, 2006, Jack Rose obtained 12,000 shares of common stock, by exercising 12,000 outstanding stock options. Mr. Rose was a Director of the Company at the time of the transaction.

On May 16, 2006, a non-executive employee of the Company obtained 4,000 shares of common stock by exercising 4,000 outstanding stock options.

On May 31, 2006, a non-executive employee of the Company obtained 4,000 shares of common stock by exercising 4,000 outstanding stock options.

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The Company’s reports on Form 8-K and Form 8-K/A filed on April 21, 2006 and April 25, 2006, respectively, refer to sales of common stock by former directors of the Company to two current directors and other investors. Concurrently with these transactions, Messrs. Bernard Korn, William Koon, Jack Rose and Carl Sussman resigned as Directors of the Company, and Mr. Korn also resigned as Chief Executive Officer and Chairman of the Board. Michael Goldman, who continues as a Director of the Company, was elected as Chairman of the Board and William Pagano, also continues as a Director and was appointed Chief Executive Officer. On May 11, 2006, Stuart H. Lubow and Phillip Siegel became Directors of the Company. Mr. Siegel also serves on the Audit Committee of the Company.

During the quarter ended June 30, 2006, holders of a total of 6,642 shares of redeemable preferred stock converted these shares into 6,642 shares of common stock.

During the six months ended June 30, 2006 and 2005, holders of a total of 15,797 shares and 18,928 shares of redeemable preferred stock converted these shares into 15,797 shares and 18,928 shares, respectively, of common stock.

3.	Supplemental Cash Flow Information

The following is supplemental information relating to the consolidated statements of cash flows:

	For the Six Months Ended
	June 30, 2006		June 30, 2005
Cash paid during the period for:

Interest	$	598,810	$	446,212

Income taxes	$	65,179	$	156,206

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4.	Net Income (Loss) Per Common Share

	For the Quarter Ended June 30,				For the Six Months Ended June 30,
	2006		2005		2006			2005
Net Income (Loss) (numerator)	$	341,833	$	520,182	$	(81,256	)	$	321,249

Weighted average common shares (denominator for basic income per share)		4,579,846		4,185,505		4,578,606			4,175,422

Effect of dilutive securities:
Convertible preferred stock		474,267		777,375		-			783,903
Convertible notes		175,000		175,000		-			175,000
Stock options		72,913		149,697		-			153,052

Weighted average common and potential common shares outstanding (denominator for diluted income per share)		5,302,026		5,287,577		4,578,606*			5,287,377

Basic net income (loss) per share	$	0.07	$	0.12	$	(0.02	)	$	0.08

Diluted net income (loss) per share	$	0.06	$	0.10	$	(0.02	)	$	0.06

* For the six months ended June 30, 2006, preferred stock convertible into 477,018 shares of common stock, notes convertible into 175,000 shares of common stock, and 82,932 stock options were not included in the income per share calculation because their effect would have been anti-dilutive.

5.	Financing Arrangements

At June 30, 2006, amounts outstanding under the Company’s credit facility with Wells Fargo Business Credit, Inc. (“Wells”) were $14,125,173, of which $62,977 represents a term loan payable in a final payment on July 1, 2006 and $500,000 represents an overadvance payable in equal installments of $12,500 each business day commencing July 11, 2006. In addition, the Company has a standby letter of credit in the amount of $300,000 which expires on July 31, 2007. Availability under the revolving credit line is determined by a percentage of available assets as defined in the Agreement, less letter of credit and reserves, and was $474,827 as of June 30, 2006. The interest rate on the $62,977 term loan and $500,000 overadvance was 8.75% (prime plus .5%) as of June 30, 2006. The interest rate on the remaining credit facility, as of June 30, 2006 was 8.0% (prime minus .25%). Effective June 23, 2006, the Agreement was amended to extend the maturity date from August 1, 2009 to August 1, 2010.

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The facility contains covenants relating to the financial condition of the Company, its business operations, and restricts the payment of dividends, subordinated debt, purchase of securities and capital expenditures. As of June 30, 2006, the Company was in default of its minimum cash flow covenant; however, Wells has waived this event of default.

6.	Litigation

Universal Supply Group, Inc.

Universal Supply Group, Inc. is a New York corporation (“Universal”). On June 25, 1999, Universal acquired substantially all of the assets of Universal Supply Group, Inc., a New Jersey corporation, including its name, pursuant to the terms of a purchase agreement. The Company filed a copy of the purchase agreement with the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g) on Form 10KSB, and the Company filed a copy of an amendment to the purchase agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form 8-K. Subsequent to the sale, Universal Supply Group, Inc. (the selling corporation) formerly known as Universal Engineering Co., Inc., changed its name to Hilco, Inc. Hilco, Inc. acquired the assets of Amber Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc., in 1998, prior to Hilco’s sale of assets to Universal. Hilco, Inc. is hereinafter referred to as the “Predecessor.” The majority shareholders of Hilco, Inc. were John A. Hildebrandt and Paul Hildebrandt.

The Company understands that Predecessor and many other companies have been sued in the Superior Court of New Jersey (Middlesex County) by plaintiffs filing lawsuits alleging injury due to asbestos. Currently, there exist 94 plaintiffs in these lawsuits relating to alleged sales of asbestos products, or products containing asbestos, by the Predecessor. The Company never sold any asbestos related products.

Of the existing plaintiffs, seven filed actions in 2006, 15 filed actions in 2005, 43 filed actions in 2004, 27 filed actions in 2003, and two filed actions in 2002. There are 105 other plaintiffs that have had their actions dismissed and eight other plaintiffs that have settled as of June 30, 2006 for a total of $3,313,000. There has been no judgment against the Predecessor.

Our Universal subsidiary was named by 24 plaintiffs; of these, two filed actions in 1999, one filed an action in 2000, five filed actions in 2001, eleven filed actions in 2005 and five filed actions in 2006. Six plaintiffs naming Universal have had their actions dismissed and, of the total $3,313,000 of settled actions, two plaintiffs naming Universal have settled for $26,500. No money was paid by Universal in connection with any settlement. Following these dismissed and settled actions, there currently exist 16 plaintiffs that name Universal.

As set forth in more detail below, the Company has been indemnified against asbestos-based claims, and insurance companies are defending the interests of the Predecessor and the Company in these cases.

Based on advice of counsel, the Company believes that none of the litigation that was brought against the Company’s Universal subsidiary through June 30, 2006 is material, and that the only material litigation that was brought against Predecessor through that date was Rhodes v. A.O. Smith Corporation, filed on April 26, 2004 in the Superior Court of New Jersey, Law Division, Middlesex County, Docket Number MID-L-2979-04AS. The Company was advised that the Rhodes case was settled for $3,250,000 under an agreement reached in connection with a $10,000,000 jury verdict that was rendered on August 5, 2005. The Company was not a defendant in the Rhodes case.

The Company believes that Rhodes differed from the other lawsuits in that plaintiff established that he contracted mesothelioma as a result of his occupational exposure to asbestos dust and fibers and that a predecessor of the Company was a major supplier of the asbestos containing products that allegedly caused his disease.

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Indemnification

John A. Hildebrandt, Paul Hildebrandt and the Predecessor have jointly and severally agreed to indemnify our Universal subsidiary from and against any and all damages, liabilities and claims due to exposure to asbestos at any time prior to the June 25, 1999 closing of the purchase agreement referred to earlier. These agreements are set forth in the purchase agreement. Paul Hildebrandt, one of the indemnitors, was a director of the Company from September 29, 2004 to January 28, 2005.

The indemnitors may use their own counsel to defend these claims. The indemnitors are not liable for any settlement effected without their consent. The indemnitors may settle and pay money claims without the consent of the Company. There is no indemnification unless claims aggregate $50,000; once this trigger point is reached, indemnification is required for all claims, including the first $50,000, but excluding claims of less than $10,000. The indemnification requirement survives at least until 30 days after the running of any relevant statutes of limitation.

The obligation of the indemnitors is joint and several, so that the Company can have recourse against any one or more of these indemnitors, whether or not any other indemnitor has previously defaulted on its obligation to us. There are no other limitations to our rights to indemnification.

Insurance

The assets that the Predecessor sold to us included its insurance policies and other agreements and contracts. The policies provide coverage for liability accruing during the periods for which premiums were paid. The Predecessor was formed in 1940. Copies of policies are available for each year beginning in 1970 and ending with the closing under the purchase agreement in 1999. Copies of policies for the period from 1940 to 1969 are not available.

Insurance companies acknowledge coverage for potential asbestos claims under certain of these policies. Insurance companies under additional policies have reserved their right to deny coverage but have continued to defend and indemnify the Predecessor and the Company under the contested policies.

There are periods during the years from 1940 to 1999 in which our Predecessor did not have coverage for potential asbestos claims. Subject to litigation, insurance companies may maintain that the existence of these periods’ results in coverage for only a portion of a particular injury that varies with the period during which there was asbestos coverage relating to the injury, and that the balance of any settlement or judgment is to be paid by the insured. To date, no insurance company has claimed any contribution for a gap in coverage except for a claim for $159.64 made by one insurance company to the Predecessor in 1995. The Predecessor asserted that it had no obligation to pay this amount and did not make any payment.

Insurance companies have to date defended us and the Predecessor, and have paid all settlement amounts and defense costs. Except for $159.64 referred to above, the insurance companies have not requested any payments from us or from the Predecessor.

Our Universal subsidiary has not engaged in the sale of asbestos products since its formation in 1997. Its product liability policies for all years since 1998 exclude asbestos claims.

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General

Regardless of indemnification and insurance coverage, we do not in any event consider our Company to be liable for the asbestos-based lawsuits that name us or for any other claim that arises as a result of actions or omissions by Predecessor companies. We expressly disclaimed the assumption of any liabilities when we purchased the assets of the Predecessor. It is our opinion that the existing asbestos litigation will not have a material adverse effect on the Company. Nevertheless, we could be materially and adversely affected if we are held liable for substantial asbestos claims or if the Company incurs substantial legal or settlement costs. This material and adverse effect would occur if indemnitors fail to honor their indemnification agreements and insurance is not available either because policy limits are exceeded, or because insurance companies successfully claim limitations on their liabilities by reason of gaps in coverage or otherwise.

Since we do not regard as likely the potential payment of any asbestos-based claim, we have not accrued any balance for any period relating to asbestos claims, and we have not recorded any amount for asbestos claims for any period in any of our financial statements.

7.	New Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an interpretation FASB No. 109 ("FIN 48"), which prescribes accounting for and disclosure of uncertainty in tax positions. This interpretation defines the criteria that must be met for the benefits of a tax position to be recognized in the financial statements and the measurement of tax benefits recognized. The provisions of FIN 48 are effective as of the beginning of the Company's 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating that impact of adopting FIN 48 on the Company's consolidated financial statements.

8.	Subsequent Events

None

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company

Colonial Commercial Corp. (“Colonial”) is a New York corporation, which was incorporated on October 28, 1964. Unless otherwise indicated, the term “Company” refers to Colonial Commercial Corp. and its consolidated subsidiaries. The Company’s operations are conducted through its wholly-owned subsidiaries, Universal Supply Group, Inc. (“Universal”), The RAL Supply Group, Inc. (“RAL”) and American/Universal Supply, Inc. (“American”).

Forward-Looking Statements

This report on Form 10-Q contains forward-looking statements relating to such matters as anticipated financial performance and business prospects. When used in this report, the words, “anticipates,” “expects,” “believes,” “may,” “intends,” and similar expressions are intended to be among the statements that identify forward-looking statements. From time to time, the Company may also publish forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements involve risks and uncertainties, including, but not limited to, the consummation of certain events referred to in this report, technological changes, competitive factors, maintaining customer and vendor relationships, inventory obsolescence and availability, and other risks detailed in the Company's periodic filings with the Securities and Exchange Commission, which could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and judgments on the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions we believe to be applicable and reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In addition, we are periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time.

We believe the following to be critical accounting policies that affect the most significant estimates and judgments used in the preparation of our consolidated financial statements:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

Revenue for the Company primarily consists of sales of heating, ventilation and air conditioning equipment, climate control systems and plumbing fixtures and supplies. The Company recognizes revenue after shipment of products has occurred in accordance with the shipping terms. There are no further obligations on the part of the Company subsequent to revenue recognition, except for returns of defective products from the Company’s customers, which are covered under the manufacturer’s warranty. The Company will receive a vendor credit from the manufacturer related to the warranted product in question, at which time credits are issued to the customer. The Company does not provide a warranty on products sold; rather the warranty is provided by the manufacturer.

Accounts Receivable

Accounts receivable consist of trade receivables recorded at original invoice amount, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. However, a service charge may be applied to receivables that are past due. These service charges are not recognized until collected, and are then included in other income. Trade receivables are periodically evaluated for collectibility based on past credit history with customers and their current financial condition. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.

Inventory

Inventory is stated at the lower of cost or market and consists solely of finished goods. Cost is determined using the first-in, first-out method.

Distribution costs of incoming freight, purchasing, receiving, inspection, warehousing and handling costs are included in selling, general and administrative expenses. Such costs were $87,368 and $90,049 for the quarter ended June 30, 2006 and 2005, respectively, and $191,307 and $188,997 for the six months ended June 30, 2006 and 2005, respectively.

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Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated on the straight line method over the estimated useful lives of the assets as follows:

Computer hardware and software	3-5 years

Furniture and fixtures	5 years

Automobiles	3-5 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset.

Deferred Income Tax Asset

The Company's deferred income tax asset represents certain future tax benefits related to the expected utilization of net operating loss carryforwards. 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.

Goodwill and Other Intangible Assets

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.

Results of Operations For the Quarter Ended June 30, 2006 and 2005

Sales increased by 3.7%, or $653,970, to $18,155,812 for the quarter ended June 30, 2006 from $17,501,842 for the same period in 2005. The increase in sales is primarily a result of increased market penetration at two of the Company’s subsidiaries, an increase in general industry pricing, and a continuing strong demand for residential and light commercial heating, air conditioning and plumbing fixtures, supplies and accessories. The increases in these areas were offset by weaknesses in sales of commercial control systems.

Gross profit increased by 6.0%, or $308,814, to $5,440,933 for the quarter ended June 30, 2006 from $5,132,119 for the same period in 2005. Gross profit expressed as a percentage of sales increased by 0.7% to 30.0% in 2006 compared to 29.3% for the comparable period in 2005. The increase in the percentage of gross profit is primarily the result of improved pricing received from manufacturers and sales of higher margin, more efficient models of air conditioning and heating systems. Cost of sales excludes the distribution costs of incoming freight, purchasing, receiving, inspection, warehousing and handling costs, as these costs are included in our selling, general and administrative expenses. Our gross margins may not be comparable to those of other entities since some entities include these distribution costs in the cost of sales. These distribution costs were $87,368 and $90,049 for the quarter ended June 30, 2006 and 2005, respectively.

The Company’s net income decreased by 34.3%, or $178,349, to $341,833 for the quarter ended June 30, 2006, compared to net income of $520,182 for the same period in 2005. Pre-tax income decreased by 37.6%, or $226,256, to $374,954 for the quarter ended June 30, 2006 from $601,210 for the same period in 2005.

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This lower net income was caused by increased expenses for personnel to improve customer service, expansion of our commercial departments, and added cost for increased gasoline, utility expenses and interest expenses. More specifically, selling, general and administrative expenses increased by 9.7%, or $424,769, to $4,793,206 for the quarter ended June 30, 2006 from $4,368,437 for the same period in 2005. Staffing costs increased by $263,823, while costs for trucking and fuel increased by $39,700.

Other income decreased by 27.5%, or $24,090, to $63,467 for the quarter ended June 30, 2006 from $87,557 for the same period in 2005. This decrease is primarily the result of a decrease in service charges collected from customers’ past due invoices in the quarter ended June 30, 2006.

Interest expense, net increased by 34.5%, or $86,211, to $336,240 for the quarter ended June 30, 2006 from $250,029 for the same period in 2005. This increase is primarily the result of increasing interest rates and increased borrowings under the credit line to support higher inventory levels in anticipation for the increased demand of sales of air conditioning products for the second quarter of 2006. The revolving credit line bears interest at .25% below prime rate, which was 8.25% at June 30, 2006 compared to 6.25% at June 30, 2005.

Results of Operations For the Six Months Ended June 30, 2006 and 2005

Sales increased by 7.1%, or $2,190,864, to $33,040,025 for the six months ended June 30, 2006 from $30,849,161 for the same period in 2005. The increase in sales is primarily a result of increased market penetration at two of the Company’s subsidiaries, an increase in general industry pricing, and a continuing strong demand for residential and light commercial heating, air conditioning and plumbing fixtures, supplies and accessories. The increases in these areas were offset by weaknesses in sales of commercial control systems.

Gross profit increased by 6.8%, or $642,510, to $10,027,700 for the six months ended June 30, 2006 from $9,385,190 for the same period in 2005. Gross profit expressed as a percentage of sales remained at 30.4% in 2006 compared to the same period in 2005. Cost of sales excludes the distribution costs of incoming freight, purchasing, receiving, inspection, warehousing and handling costs, as these costs are included in our selling, general and administrative expenses. Our gross margins may not be comparable to those of other entities since some entities include these distribution costs in the cost of sales. These distribution costs were $191,307 and $188,997 for the six months ended June 30, 2006 and 2005, respectively.

The Company reported a net loss of $81,256 for the six months ended June 30, 2006, compared to net income of $321,249 for the same period in 2005. Pre-tax loss is $29,014 for the six months ended June 30, 2006 compared to a pretax profit of $421,973 for the same period in 2005.

This net loss was caused by increased expenses for personnel to improve customer service, expansion of our commercial departments, and added cost for increased gasoline, utility expenses, interest expenses and decreasing sales in our commercial control systems business. More specifically, selling, general and administrative expenses increased by 10.8%, or $931,006, to $9,550,068 for the six months ended June 30, 2006 from $8,619,062 for the same period in 2005. Staffing costs increased by $550,907, while costs for trucking, fuel, and facilities increased by $136,579.

Other income decreased by 13.5%, or $20,179, to $129,256 for the six months ended June 30, 2006 from $149,435 for the same period in 2005. This decrease is primarily the result of a decrease in service charges collected from customers’ past due invoices in the six months ended June 30, 2006.

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Interest expense, net increased by 28.8%, or $142,312, to $635,902 for the six months ended June 30, 2006 from $493,590 for the same period in 2005. This increase is primarily the result of increasing interest rates and increased borrowings under the credit line to support higher inventory levels in anticipation for the increased demand of sales of air conditioning products for the second quarter of 2006. The revolving credit line bears interest at .25% below prime rate, which was 8.25% at June 30, 2006 compared to 6.25% at June 30, 2005.

The following table summarizes information derived from the Company’s consolidated statements of income expressed as a percentage of sales for the quarter and six months June 30, 2006 and 2005.

	For the Quarter						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		70.0			70.7			69.6			69.6
Gross profit		30.0			29.3			30.4			30.4

Selling, general and administrative expenses		26.4			25.0			28.9			27.9
Operating income		3.6			4.3			1.5			2.5

Other income		0.4			0.5			0.4			0.5
Interest expense, net		(1.9	)		(1.4	)		(1.9	)		(1.6	)
Income before taxes		2.1			3.4			0.0			1.4

Income taxes		(0.2	)		(0.4	)		(0.2	)		(0.4	)

Net income (loss)		1.9	%		3.0	%		(0.2	)%		1.0	%

Liquidity and Capital Resources

The Company has a $15,000,000 secured loan facility pursuant to a credit and security agreement (“Agreement”) with Wells. On May 11, 2006 the Company received a $500,000 overadvance, payable in equal installments of $12,500 each business day commencing July 11, 2006. Effective June 23, 2006, the Agreement was amended to extend the maturity date from August 1, 2009 to August 1, 2010. The facility consists of a revolving line of credit which expires on August 1, 2010, a term loan with a balance of $62,977 as of June 30, 2006, payable in a final payment on July 1, 2006 and a $500,000 overadvance. In addition, the Company has a standby letter of credit in the amount of $300,000 which expires on July 31, 2007. Availability under the revolving credit line is determined by a percentage of available assets as defined in the Agreement, less letter of credit and reserves, and was $474,827 as of June 30, 2006. The balance outstanding under the revolving line of credit including the term loan and overadvance was $14,125,173 as of June 30, 2006. The revolving credit line bears interest at .25% below prime, and the term loan and overadvance bear interest at .50% above prime. Substantially all of the assets of the Company, as well as a pledge of the stock of Colonial Commercial Corp.’s operating subsidiaries, collateralize the loans. The facility contains covenants relating to the financial condition of the Company, its business operations, and restricts the payment of dividends, subordinated debt, purchase of securities and capital expenditures. As of June 30, 2006, the Company was in default of its minimum cash flow covenant; however, Wells has waived this event of default. All loans are due on demand by the bank, and accordingly, have been classified as current liabilities.

The Company believes that the credit facility is sufficient to finance its current operating needs. However, the business of the Company would be materially and adversely affected if the bank demands payment of the loan and the Company is unable to refinance the loan.

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As of June 30, 2006, the Company had $970,012 in cash compared with $613,456 at December 31, 2005.

Net cash used in operating activities was $1,782,824 for the six months ended June 30, 2006. The net cash used in operating activities for the 2006 period is primarily a result of a net loss of $81,256 and cash used in operating assets and liabilities of $2,033,934, offset by non-cash charges of $332,366. The increase in accounts receivable of $717,287 was primarily a result of increased sales during the second quarter. Accounts payable increased due to increased inventory purchases to support increased sales.

Cash flows used in investing activities of $195,959 during the quarter ended June 30, 2006 were due to purchases of equipment.

The cash flows provided by financing activities of $2,335,339 consisted of $2,129,188 in borrowings under the credit facility-revolving credit, $500,000 in borrowings under the credit facility-overadvance, $8,000 received from the exercise of stock options and $13,073 from the issuance of notes payable. Cash flows used in financing activities consisted of $250,000 for repayments under the credit facility-term loan and $64,922 for repayments on notes payable.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. The Company has no financial instruments that give it exposure to foreign exchange rates or equity prices.

The Company’s pre-tax earnings and cash flows are exposed to changes in interest rates. All borrowings under its credit facility bear interest based on the prime rate less .25%, except for the term loan, with a balance of $62,977, and overadvance, with a balance of $500,000, as of June 30, 2006, which bear interest at a rate of prime plus .5% and a $750,000 note to Goldman Associates of NY, Inc. which bears interest at prime. A hypothetical 10% adverse change in such rates would reduce the pre-tax earnings and cash flows for the quarter ended June 30, 2006 by approximately $119,611 over a one-year period, assuming the borrowing level remains consistent with the outstanding borrowings as of June 30, 2006. The fair value of the borrowings under the credit facility is not affected by changes in market interest rates.

The Company’s remaining interest-bearing obligations are at fixed rates of interest and as such, do not expose the pre-tax earnings and cash flows to changes in market interest rates. The change in fair value of the Company’s fixed rate obligations resulting from a hypothetical 10% adverse change in interest rates would not be material.

Item 4. Controls and Procedures

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 June 30, 2006 (“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.

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Changes in Internal Controls

Subsequent to that evaluation, there have been no changes in our internal controls or other factors that could materially affect these controls after such evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company’s Legal Proceedings are incorporated by reference from Part I Financial Information, Item 1 Financial Statements, Section 6 Litigation, of this Report on Form 10-Q.

Items 1A, 2 and 3 are not applicable and have been omitted.

Item 4. Submission of Matters to a Vote of Security Holders

An Annual Meeting of Shareholders was held on June 13, 2006.

On June 13 2006, the common and preferred shareholders elected E. Bruce Fredrikson, Melissa Goldman-Williams, Michael Goldman, Stuart H. Lubow, Ronald H. Miller, William Pagano and Phillip Siegel as Directors. The common and preferred shareholders voted in favor of a resolution appointing Weiser, LLP as the independent public accountants for the Company for the fiscal year ending December 31, 2006.

PROPOSAL	FOR		AGAINST		ABSTAINED

For the common and preferred shareholders to elect E. Bruce Fredrikson, Melissa Goldman-Williams, Michael Goldman, Stuart H. Lubow, Ronald H. Miller, William Pagano and Phillip Siegel as Directors:

E. Bruce Fredrikson		4,116,134		-		13,725
Melissa Goldman-Williams		4,057,295		-		72,564
Michael Goldman		4,057,243		-		72,616
Stuart H. Lubow		4,116,929		-		12,930
Ronald H. Miller		4,116,311				13,548
William Pagano		4,057,561		-		72,298
Phillip Siegel		4,116,929		-		12,930

To ratify the selection of Weiser, LLP as independent public accountants of the Company for the fiscal year ending December 31, 2006:		4,110,663		14,263		4,933

Item 5 is not applicable and has been omitted.

Item 6. Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dated: August 11, 2006		COLONIAL COMMERCIAL CORP.

		/s/ William Pagano
		William Pagano,
		Chief Executive Officer

		/s/ William Salek
		William Salek,
		Chief Financial Officer