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Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended May 31, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from 
to



Commission file number 0-12490



ACR GROUP, INC.

(Exact name of
registrant as specified in its charter)



|Texas                                          |  | 74-2008473         
|---------------------------------------------- |  | -------------------
|State or other jurisdiction of                 |  | (I.R.S. Employer   
|incorporation or organization)                 |  | Identification No.)
|                                               | 
|3200 Wilcrest Drive, Suite 440, Houston, Texas |  | 77042-6039         
|(Address of principal executive offices)       |  | (Zip Code)         



(713) 780-8532

(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, and (2) has been subject to such filing requirements for the past 90 days.

Yes x        No ̈



Shares of Common Stock outstanding at June 30, 200310,681,294.



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ACR GROUP, INC. AND SUBSIDIARIES



INDEX TO QUARTERLY REPORT ON FORM 10-Q



|               |  |                       |  |                                                                                                    |  | Page
|-------------- |  | --------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|               |  |                      
|PART I         |  | FINANCIAL INFORMATION |  |                                                                                                   
|               |  |                       | 
|               |  | Item 1.               |  | Financial Statements                                                                               |  |     
|               |  |                       | 
|               |  |                       |  | Condensed Consolidated Balance Sheets  May 31, 2003 (Unaudited) and February 28, 2003             |  | 3   
|               |  |                       | 
|               |  |                       |  | Condensed Consolidated Statements of Operations (Unaudited)  Quarters Ended May 31, 2003 and 2002 |  | 5   
|               |  |                       | 
|               |  |                       |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  Quarters Ended May 31, 2003 and 2002 |  | 6   
|               |  |                       | 
|               |  |                       |  | Notes to Condensed Consolidated Financial Statements                                               |  | 7   
|               |  |                       | 
|               |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 10  
|               |  |                       | 
|               |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                         |  | 15  
|               |  |                       | 
|               |  | Item 4.               |  | Controls and Procedures                                                                            |  | 15  
|               |  |                      
|PART II        |  | OTHER INFORMATION     |  |                                                                                                   
|               |  |                       | 
|               |  | Item 1.               |  | Legal Proceedings                                                                                  |  | 16  
|               |  |                       | 
|               |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                   |  | 16  
|               | 
|SIGNATURES     |  | 16                   
|               | 
|CERTIFICATIONS |  | 17                   



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1.Financial Statements



ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



ASSETS



|                                                        |  | May 31,2003 |        | February 28,2003
|------------------------------------------------------- |  | ----------- | ------ | ----------------
|                                                        |  | (Unaudited) |        |                 
|Current assets:                                         |  |             |        |                 
|Cash                                                    |  | $           | 50     |                 
|Accounts receivable, net                                |  |             | 18,910 |                 
|Inventory                                               |  |             | 25,993 |                 
|Prepaid expenses and other                              |  |             | 951    |                 
|Deferred income taxes                                   |  |             | 1,311  |                 
|                                                        |  |             |        |                 
|Total current assets                                    |  |             | 47,215 |                 
|                                                        |  |             |        |                 
|Property and equipment, net of accumulated depreciation |  |             | 4,811  |                 
|Goodwill, net of accumulated amortization               |  |             | 5,258  |                 
|Other assets                                            |  |             | 432    |                 
|                                                        |  |             |        |                 
|Total assets                                            |  | $           | 57,716 |                 
|                                                        |  |             |        |                 



The accompanying notes
are an integral part

of these condensed financial statements.



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##### Table of Contents

ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                      |  | May 31,2003 |         |   | February 28,2003 |  
|--------------------------------------------------------------------- |  | ----------- | ------- | - | ---------------- | -
|                                                                      |  | (Unaudited) |         |   |                  |  
|Current liabilities:                                                  |  |             |         |   |                  |  
|Current maturities of long-term debt and capital lease obligations    |  | $           | 373     |   |                  | $
|Accounts payable                                                      |  |             | 22,865  |   |                  |  
|Accrued expenses and other liabilities                                |  |             | 2,631   |   |                  |  
|                                                                      |  |             |         |   |                  |  
|Total current liabilities                                             |  |             | 25,869  |   |                  |  
|                                                                      |  |             |         |   |                  |  
|Revolving line of credit                                              |  |             | 18,363  |   |                  |  
|Long-term debt and capital lease obligations, less current maturities |  |             | 1,810   |   |                  |  
|                                                                      |  |             |         |   |                  |  
|Total long-term obligations                                           |  |             | 20,173  |   |                  |  
|                                                                      |  |             |         |   |                  |  
|Shareholders equity:                                                 |  |             |         |   |                  |  
|Common stock                                                          |  |             | 107     |   |                  |  
|Additional paid-in capital                                            |  |             | 41,691  |   |                  |  
|Accumulated deficit                                                   |  |             | (30,124 | ) |                  |  
|                                                                      |  |             |         |   |                  |  
|Total shareholders equity                                            |  |             | 11,674  |   |                  |  
|                                                                      |  |             |         |   |                  |  
|Total liabilities and shareholders equity                            |  | $           | 57,716  |   |                  | $
|                                                                      |  |             |         |   |                  |  



The accompanying notes
are an integral part

of these condensed financial statements.



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##### Table of Contents

ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                      |  | Three months ended May 31, |           
|--------------------------------------------------------------------- |  | -------------------------- | ----------
|                                                                      |  | 2003                       |           
|Sales                                                                 |  | $                          | 42,317    
|Cost of sales                                                         |  |                            | 33,012    
|                                                                      |  |                            |           
|Gross profit                                                          |  |                            | 9,305     
|                                                                      |  |                           
|Selling, general and administrative costs                             |  |                            | 8,233     
|                                                                      |  |                            |           
|Operating income                                                      |  |                            | 1,072     
|                                                                      |  |                           
|Interest expense                                                      |  |                            | 385       
|Other non-operating (income)                                          |  |                            | (103      
|                                                                      |  |                            |           
|Income before income taxes and cumulative effect of accounting change |  |                            | 790       
|                                                                      |  |                           
|                                                                      |  |                            |           
|Provision for income taxes:                                           |  |                            |           
|Current                                                               |  |                            | 154       
|Deferred                                                              |  |                            | 148       
|                                                                      |  |                            |           
|Income before cumulative effect of accounting change                  |  |                            | 488       
|Cumulative effect of accounting change, net of taxes                  |  |                            |          
|                                                                      |  |                            |           
|Net income (loss)                                                     |  | $                          | 488       
|                                                                      |  |                            |           
|Basic and diluted earnings (loss) per share:                          |  |                            |           
|Before cumulative effect of change in accounting principle            |  | $                          | .05       
|Cumulative effect of accounting change                                |  |                            |          
|                                                                      |  |                            |           
|                                                                      |  | $                          | .05       
|                                                                      |  |                            |           
|Weighted average shares outstanding, basic and diluted                |  |                            | 10,681,294
|                                                                      |  |                            |           





The accompanying notes are an integral part

of these condensed financial statements.



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ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                      |  | Three months endedMay 31, |       
|----------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                      |  | 2003                      |       
|Operating activities:                                                                                 |  |                           |       
|Net income (loss)                                                                                     |  | $                         | 488   
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:              |  |                           |       
|Cumulative effect of change in accounting principle                                                   |  |                           |      
|Depreciation and amortization                                                                         |  |                           | 258   
|Deferred income tax expense                                                                           |  |                           | 147   
|Other                                                                                                 |  |                           |      
|Changes in operating assets and liabilities:                                                          |  |                           |       
|Accounts receivable, net                                                                              |  |                           | (3,708
|Inventory                                                                                             |  |                           | (1,404
|Prepaid expenses and other assets                                                                     |  |                           | (412  
|Accounts payable                                                                                      |  |                           | 5,923 
|Accrued expenses and other liabilities                                                                |  |                           | 534   
|                                                                                                      |  |                           |       
|Net cash provided by operating activities                                                             |  |                           | 1,826 
|                                                                                                      |  |                           |       
|Investing activities:                                                                                 |  |                           |       
|Acquisition of property and equipment                                                                 |  |                           | (127  
|Proceeds from disposition of assets                                                                   |  |                           | 179   
|                                                                                                      |  |                           |       
|Net cash provided by (used in) investing activities                                                   |  |                           | 52    
|                                                                                                      |  |                           |       
|Financing activities:                                                                                 |  |                           |       
|Net borrowings (payments) on revolving credit facility                                                |  |                           | (1,809
|Payments on long-term debt                                                                            |  |                           | (123  
|                                                                                                      |  |                           |       
|Net cash (used in) provided by financing activities                                                   |  |                           | (1,932
|                                                                                                      |  |                           |       
|Net (decrease) in cash                                                                                |  |                           | (54   
|Cash at beginning of year                                                                             |  |                           | 104   
|                                                                                                      |  |                           |       
|Cash at end of period                                                                                 |  | $                         | 50    
|                                                                                                      |  |                           |       
|Non-cash sale of subsidiarys inventory and tangible capital assets for issuance of a note receivable |  | $                         | 224   
|                                                                                                      |  |                           |       



The accompanying notes
are an integral part

of these condensed financial statements.





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##### Table of Contents

ACR GROUP, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1Basis of Presentation



The accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with accounting principles generally accepted in the United States. Accordingly, they do not include all of the information and footnotes required for complete financial statements, and therefore should be
reviewed in conjunction with the financial statements and related notes thereto contained in the Companys annual report for the year ended February 28, 2003 filed on Form 10-K with the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Actual operating results for the three months ended May 31, 2003, are not necessarily indicative of the results
that may be expected for the fiscal year ended February 29, 2004.



Certain reclassifications were made to the prior years financial statements to conform with current year presentation.



2Summary of Significant Accounting Policies



For a description of these policies, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Companys Annual Report on
Form 10-K for the year ended February 28, 2003 and to Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, below.



3Contingent Liabilities



The Company has an arrangement with an HVACR equipment manufacturer and a bonded warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of certain of the Companys operations, with payment due only when products are sold. The supplier retains legal title and substantial management control with respect to the consigned inventory. The Company is
responsible for damage to and loss of inventory that may occur at its premises. The Company has the ability to return consigned inventory, at its sole discretion, to the supplier for a specified period of time after receipt of the inventory. Such
inventory is accounted for as consigned merchandise and is not recorded on the Companys balance sheet. As of May 31, 2003, the cost of such inventory held in the bonded warehouses was approximately $ 7,281,000.



The terms of the consignment agreement further provide that the Company may
be required to purchase inventory not sold within a specified period of time. Historically, most consigned inventory is sold before the specified purchase date, and the supplier has never enforced its right to demand payment, instead permitting such
inventory to remain on consignment.



4Goodwill



Goodwill represents the excess cost of companies acquired over the fair value
of their tangible net assets. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (SFAS) Number 142. Goodwill attributable to each of the Companys reporting units is



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tested for impairment by comparing the fair value of each reporting unit with its carrying value. These impairment tests
are performed at least annually. The Company performs the annual impairment test as of its year-end during the first quarter of each fiscal year.



Upon adopting SFAS No. 142, the Companys impairment tests performed during the Quarter ended May 31, 2002 resulted in a charge of $733,000, or
$483,000 net of taxes, to reduce the carrying value of goodwill to its implied fair value. This charge was recorded as a cumulative effect of change in accounting principle in the Companys financial statements. The Company completed its annual
impairment test as of February 28, 2003 in the first quarter of fiscal year 2004. This impairment test resulted in no additional impairment charges.



5New Accounting Pronouncements



In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statement No. 4, 44, and 64,
Amendments of FASB Statement No. 13 and Technical Corrections. This statement eliminates the requirement under SFAS 4 to aggregate and classify all gains and losses from extinguishment of debt as an extraordinary item, net of related income
tax effect. This statement also amends SFAS 13 to require certain lease modifications with economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 requires
reclassification of gains and losses in all prior periods presented in comparative financial statements related to debt extinguishment that do not meet the criteria for extraordinary item in APB 30. The statement is effective for fiscal years
beginning after May 15, 2002 with early adoption encouraged. The Company adopted SFAS 145 effective March 1, 2003. The adoption of the statement had no material impact on the Companys financial position or results of operations.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation requires certain guarantees to be recorded at fair value and also requires a guarantor to
make certain disclosures regarding guarantees. The Interpretations initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements became effective for the Companys first quarter of 2004. The adoption of the statement had no material impact on the Companys financial position or results of operations.



In January 2003, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. EITF 02-16 clarifies certain aspects for accounting and recording of consideration received from
vendors. Certain provisions of the EITF are effective for fiscal years beginning after December 15, 2002, and other provisions of the EITF are effective for arrangements entered into after November 21, 2003. The Companys historical accounting
for consideration received from vendors is consistent with the provisions of EITF 02-16. Therefore, the adoption of this standard had no material impact on the Companys financial statements.



In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. In general, a variable interest entity is a corporation, partnership, trust, or other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its activities. Interpretation 46 requires a variable interest entity to be consolidated by a company if that company is



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subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. The Company does not believe the adoption of the Interpretation will have a material impact on its financial statements.



6Income Taxes



The Company and its subsidiaries file a consolidated federal income tax return. The Company uses the liability method in accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.



The Company increased
the effective federal income tax rate to 34% for fiscal 2004 from 21% in fiscal 2003 due to the expiration and utilization of tax loss carryforwards. The tax expense will be used to decrease the deferred tax asset and increase the tax liability for
estimated taxes payable, net of the operating loss carryforwards. The Company had approximately $1,343,000 in tax loss carryforwards at the beginning of fiscal 2004.



7Debt



The Company has a revolving line of credit arrangement with a commercial bank (Bank). The maximum amount that may be borrowed under the
revolving line of credit is $25 million, and $1 million for capital expenditures. At May 31, 2003, the Company had available credit of $5.1 and $0.2 million under the revolving credit line and the capital expenditure term loan facility,
respectively. The agreement terminates in May 2004, but is automatically extended for one-year periods unless either party gives notice of termination to the other.



8Stock-Based Compensation



In accordance with the provisions of SFAS 123, Accounting for Stock-based Compensation, the Company has elected to follow the Accounting
Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employees stock-based compensation plans. Under APB 25, if the exercise price of employee stock
options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized.



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Had compensation expense been determined consistent with SFAS 123, the Companys net income (loss) and earnings
(loss) per share would have been changed to the following pro forma amounts:



|                                                                                                   |  | Quarter Ended May 31, |    
|-------------------------------------------------------------------------------------------------- |  | --------------------- | ---
|                                                                                                   |  | 2003                  |    
|Net income (loss) applicable to common shareholders as reported                                    |  | $                     | 488
|Total stock-based employee compensation expense under fair value method for all awards, net of tax |  |                       |   
|                                                                                                   |  |                       |    
|Pro forma income (loss) applicable to common shareholders                                          |  | $                     | 488
|                                                                                                   |  |                       |    
|Basic and diluted earnings per share:                                                              |  |                       |    
|As reported                                                                                        |  | $                     | .05
|Pro forma                                                                                          |  |                       | .05
|                                                                                                   |  |                       |    

|
|

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



INTRODUCTION



ACR Group, Inc. and its subsidiaries (collectively, the Company) is an independent distributor of heating, air conditioning and refrigeration (HVACR) equipment and related parts and supplies.
The Company is among the ten largest such distributors in the United States. Substantially all of the Companys sales are to contractor dealers and institutional end-users. Generally accepted accounting principles allow the aggregation of an
enterprises segments if they are similar. Although the Company operates in different geographic areas, we have reviewed the aggregation criteria and determined that the Company operates as a single segment based on the high degree of
similarity of the Companys operations.



This
report on Form 10-Q includes certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking
statements involve risks and uncertainties that could cause actual results or outcomes to differ materially. Such risks and uncertainties may include the availability of debt or equity capital to fund the Companys working capital requirements,
unusual weather conditions, the effects of competitive pricing, the strength of construction markets and general economic conditions. Our expectations and beliefs are expressed in good faith and we believe there is a reasonable basis for them, but
there can be no assurance that our expectations, beliefs or projections will be achieved or accomplished. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided under the securities laws.



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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2003 COMPARED TO THE THREE MONTHS ENDED MAY 31, 2002



The Company recognized net income of $488,000 for the quarter ended May
31, 2003 (fiscal 2004) compared to a net loss of $24,000 for the quarter ended May 31, 2002 (fiscal 2003). The Companys results for the first quarter of fiscal 2003 included a charge of $483,000, net of taxes, related to the adoption of a new
accounting standard for reporting of goodwill and other intangible assets. As discussed below, the Companys effective tax rate in fiscal 2004 is expected to be significantly greater than in fiscal 2003. Income before income taxes and
cumulative effect of accounting change was $790,000 in the quarter ended May 31, 2003, compared to $614,000 in the quarter ended May 31, 2002, an increase of 29%. The increase in such income was attributable to improved gross margins, effective
expense controls and lower interest costs in fiscal 2004 compared to fiscal 2003.



Consolidated sales decreased 1% during the quarter ended May 31, 2003 compared to the quarter ended May 31, 2002. Sales growth was strong only in California, where six of seven branch operations generated sales gains
over 10%. Sales growth was moderate in Texas and Florida, helped by seasonally warm weather in late April and May. Sales declined slightly in Georgia and Tennessee, where weather conditions were unusually cool and wet in April and May. Sales at the
Companys Colorado business unit also declined slightly in the first quarter of fiscal 2004, continuing the trend of the last eighteen months, resulting from a slowdown in the areas residential new construction. However, sales at the
Colorado unit improved toward the end of the first quarter, raising hopes that the economic cycle is reversing.



The Companys same-store sales in the first five months of calendar 2003 increased 0.4% over 2002, compared to a 4% decline in industry-wide product
shipments during the same period based on data compiled by a leading industry trade association. Same-store comparisons exclude operations at both a branch in Alabama that was closed in the fourth quarter of fiscal 2003, and a business unit in
Tennessee that distributed building controls and was sold in April 2003. The sale of the assets of the Tennessee business unit was at approximately net book value and is not material to the Companys financial statements.



The Companys consolidated gross margin percentage on sales was 22.0%
for the quarter ended May 31, 2003, compared to 21.2% for the quarter ended May 31, 2002. The increase in gross margin percentage was attributable principally to improved pricing disciplines throughout the Company.



Selling, general and administrative (SG&A) expenses increased
by 1% in the quarter ended May 31, 2003 compared to the same quarter of 2002. Expressed as a percentage of sales, SG&A expenses increased in the first quarter from 19.0% in 2002 to 19.5% in 2003.



Interest expense decreased 14% from May 31, 2003 to May 31, 2002 as a result
of both lower average interest rates on the Companys variable rate debt and lower outstanding debt. Average funded indebtedness declined 8% in the quarter ended May 31, 2003, compared to the preceding year.



The Company has estimated a federal income tax rate of 34% to systematically
amortize through fiscal 2004 the deferred tax asset related to its net operating loss carryforward and to provide for taxes payable. Substantially all of the Companys net operating loss carryforward will either expire, or is expected to be
utilized, by the end of fiscal 2004. In the first quarter of fiscal 2003, the Company estimated a tax rate of 21% to amortize its deferred tax asset, and the current provision for income taxes consisted principally of federal alternative minimum
taxes and state income taxes.



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The cumulative effect of accounting change reflects the result of adopting the provisions SFAS No. 142,
Goodwill and Other Intangible Assets as of March 1, 2002. For further explanation, see Note 4 of Notes to Condensed Consolidated Financial Statements.



LIQUIDITY AND CAPITAL RESOURCES



In the quarter ended May 31, 2003, the Company generated cash flow from operations of $1,826,000, compared to $77,000 in the same quarter of 2002, as a
result of better working capital management. Gross accounts receivable represented 39 days of gross sales as of May 31, 2003 compared to 41 days at May 31, 2002, and is the lowest number of days sales receivable at the end of a reporting period in
the Companys history. Management continues to emphasize credit management and active collection efforts at its operating units, but we do not anticipate that significant further reduction is achievable without adversely impacting sales.
Inventory at May 31, 2003 was 9% less than at May 31, 2002, as stocking levels were reduced in anticipation of slower growth due to economic conditions. Approximately 20% of the inventory reduction from 2002 to 2003 was attributable to closure of
the two branch operations described above.



The Company has
credit facilities with a commercial bank (Bank) which include an $25 million revolving line of credit, and $1 million for capital expenditures. Outstanding borrowings on the revolving credit line change daily depending on cash
collections and disbursements. During the quarter ended May 31, 2003, the Company did not borrow additional funds from its capital expenditure facility.At May 31, 2003, the Company had available credit of $5.1 and $0.2 million under the
revolving credit line and the capital expenditure term loan facility, respectively.As of May 31, 2003, borrowings under both credit facilities bear interest at either the prime rate or LIBOR plus 2.75%, and the Company had elected the LIBOR
option on substantially all outstanding borrowings. The Company has fixed the interest rate on $8 million of borrowings under the facility, and the balance of borrowings bears interest at a floating rate. As of May 31, 2003, the average interest
rate on all borrowings was 5.98%. Management believes that availability under the revolving credit facility will be adequate to finance the Companys working capital requirements of its existing operations for the foreseeable future.



The Company had approximately $1.3 million in tax loss
carryforwards at the beginning of fiscal 2004. Such operating loss carryforwards are expected to be fully utilized to reduce the Companys federal income tax liabilities in fiscal 2004.



SEASONALITY



The Companys sales volume and, accordingly, its operating income vary significantly during its fiscal year. The
highest levels of sales occur during the times of the year when climatic conditions require the greatest use of air conditioning, since the Companys operations are concentrated in the warmer sections of the United States. Accordingly, sales
will be highest in the Companys second quarter ending August 31, and will be lowest in its fourth quarter.



INFLATION



The Company does not believe that inflation has had a material effect on its results of operations in recent years. Generally, manufacturer price increases attributable to inflation uniformly affect both the Company
and its competitors, and such increases are passed through to customers as an increase in sales prices.



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NEW ACCOUNTING PRONOUNCEMENTS



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No. 4, 44, and 64, Amendments of FASB Statement No. 13 and Technical
Corrections. This statement eliminates the requirement under SFAS 4 to aggregate and classify all gains and losses from extinguishment of debt as an extraordinary item, net of related income tax effect. This statement also amends SFAS 13 to
require certain lease modifications with economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 requires reclassification of gains and losses in all prior
periods presented in comparative financial statements related to debt extinguishment that do not meet the criteria for extraordinary item in APB 30. The statement is effective for fiscal years beginning after May 15, 2002 with early adoption
encouraged. The Company adopted SFAS 145 effective March 1, 2003. The adoption of the statement had no material impact on the Companys financial position or results of operations.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation requires certain guarantees to be recorded at fair value and also requires a guarantor to make certain disclosures regarding guarantees. The
Interpretations initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements became effective for the Companys
first quarter of 2004. The adoption of the statement had no material impact on the Companys financial position or results of operations.



In January 2003, the Emerging Issues Task Force (EITF) reached a final consensus on EITF Issue No. 02-16, Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor. EITF 02-16 clarifies certain aspects for accounting and recording of consideration received from vendors. Certain provisions of the EITF are effective for fiscal years beginning after
December 15, 2002, and other provisions of the EITF are effective for arrangements entered into after November 21, 2003. The Companys historical accounting for consideration received from vendors is consistent with the provisions of EITF
02-16. Therefore, the adoption of this standard has not had a material impact on the Companys financial statements.



In January 2003, the FASB issued Interpretation 46, Consolidation of Variable Interest Entities. In general, a variable interest entity is a corporation,
partnership, trust, or other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its
activities. Interpretation 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of
the entitys residual returns or both. The Company does not believe the adoption of the interpretation will have a material impact on its financial statements.



CRITICAL ACCOUNTING POLICIES



The accounting policies discussed below are critical to the Companys business operations and an understanding of the Companys financial
statements. The financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make assumptions and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses in each reporting period. Management bases its estimates on historical experience and other factors that are believed to be reasonable under the



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circumstances. Actual results, once known, may vary from managements estimates.



Revenue Recognition



The Company recognizes revenue in accordance with SEC Statement of Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. Substantially all of the Companys revenues consist of sales of HVACR products that are purchased by the Company from suppliers; less than 5% of the Companys sales are of products that it manufactures. SAB 101
requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the amounts recognized are fixed and determinable, and
(4) collectibility is reasonably assured. The Company records revenue after it receives an order from a customer with a fixed determinable price and the order is either shipped or delivered to the customer.



Vendor Rebates



The Company receives rebates from certain vendors based on the volume of product purchased from the vendor. The Company
records rebates when they are earned, i.e. when specified purchase volume levels are reached.



Allowance for Doubtful Accounts



The Company records an allowance for doubtful accounts for estimated losses resulting from the inability to collect accounts receivable from customers. The Company establishes the allowance based on historical experience, credit risk of
specific customers and transactions, and other factors. Management believes that the lack of customer concentration is a significant factor that mitigates the Companys accounts receivable credit risk. Two customers represented 2.2% and 1.3% of
consolidated fiscal 2003 sales, respectively, and no other customer comprised as much as 1% of sales. The number of customers and their distribution across the geographic areas served by the Company help to reduce the Companys credit exposure
to a single customer or to economic events that affect a particular geographic region. Although the Company believes that its allowance for doubtful accounts is adequate, any future condition that would impair the ability of a broad section of the
Companys customer base to make payments on a timely basis may require the Company to record additional allowance



Inventory



Inventories consist of HVACR equipment, parts and supplies and are valued at the lower of cost or market value using the average cost method. Substantially all inventories represent finished goods held for sale; raw
materials represent less than 2% of inventories. When necessary, the carrying value of obsolete or excess inventory is reduced to estimated net realizable value. The process for evaluating the value of obsolete or excess inventory requires estimates
by management concerning future sales levels and the quantities and prices at which such inventory can be sold in the ordinary course of business.



The Company holds a substantial amount of HVACR equipment inventory at several branches on consignment from a supplier. The terms of this arrangement
provide that the inventory is held for sale in bonded warehouses at the branch premises, with payment due only when products are sold. The supplier retains legal title and substantial management control with respect to the consigned inventory. The
Company is responsible for damage to and loss of inventory that may occur at its premises. The Company has the ability to return consigned inventory, at its sole discretion, to the supplier for a specified period of time after receipt of the
inventory. The terms of the arrangement further provide that the supplier may



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require the Company to purchase consigned inventory not sold within a specified period of time. Historically, most
consigned inventory is sold before the specified purchase date, and the supplier has never enforced its right to demand payment, instead permitting such inventory to remain on consignment.



This consignment arrangement allows the Company to have inventory available
for sale to customers without incurring a payment obligation for the inventory prior to a sale. Because of the control retained by the supplier and the uncertain time when a payment obligation will be incurred, the Company does not record the
consigned inventory as an asset upon receipt with a corresponding liability. Rather, the Company records a liability to the supplier only upon sale of the inventory to a customer. The amount of the consigned inventory is disclosed in the
Companys financial statements as a contingent obligation.



Item 3.Quantitative and Qualitative Disclosures About Market Risk



The Company is subject to market risk exposure related to changes in interest rates on its senior credit facility, which includes revolving credit and
term notes. These instruments carry interest at a pre-agreed upon percentage point spread from either the prime interest rate or LIBOR. Under its senior credit facility the Company may, at its option, fix the interest rate for certain borrowings
based on a spread over LIBOR for 30 days to 6 months. At May 31, 2003 the Company had $18.4 million outstanding under its senior credit facility, of which $10.4 million is subject to variable interest rates. Based on this balance, an immediate
change of one percent in the interest rate would cause a change in interest expense of approximately $104,000, or $.01 per basic share, on an annual basis.



Item 4.Controls and Procedures



Based on their most recent evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures, which was completed within 90 days of the filing of this Quarterly Report on Form 10-Q, the
Companys Chief Executive Officer and Chief Financial Officer have each concluded that the Companys disclosure controls and procedures required to be included in this Quarterly Report, were effective as of the date of their evaluation in
timely alerting them to material information relating to the Company, including its consolidated subsidiaries. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls.



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PART IIOTHER INFORMATION



Item 1.Legal Proceedings



None



Item 6.Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------



99.1

Certification from the Chief Executive Officer of ACR Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.99.2

Certification from the Chief Financial Officer of ACR Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.




|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



The Company filed an 8-K on May 30, 2003, filing its earnings release for the fiscal year ended February 28, 2003.



SIGNATURES



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



|              |  | ACR GROUP, INC.          
|------------- |  | -------------------------
|              | 
|July 15, 2003 |  | /s/ Anthony R. Maresca   
|Date          |  | Anthony R. Maresca       
|              |  | Senior Vice-President and
|              |  | Chief Financial Officer  



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CERTIFICATIONS



Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002



I, Alex Trevino, Jr., certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of ACR Group, Inc.;
|-- |  | ----------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|July 15,
2003 |  | /s/ Alex Trevino, Jr.  
|------------- |  | -----------------------
|Date          |  | Alex Trevino, Jr.      
|              |  | President and          
|              |  | Chief Executive Officer



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CERTIFICATIONS



Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



I, Anthony R. Maresca, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of ACR Group, Inc.;
|-- |  | ----------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|July 15,
2003 |  | /s/ Anthony R. Maresca 
|------------- |  | -----------------------
|Date          |  | Anthony R. Maresca     
|              |  | Chief Financial Officer



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