ACR GROUP INC - 10-Q Quarterly Report

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 August 31, 2004

¨	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

incorporation or organization)

(I.R.S. Employer 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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as filed in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Shares of Common Stock outstanding at September 30, 2004 - 10,712,294.

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 – August 31, 2004 (Unaudited) and February 29, 2004 (Restated)	3

		Condensed Consolidated Statements of Operations (Unaudited) – Quarter and Six Months Ended August 31, 2004 and August 31, 2003 (Restated)	5

		Condensed Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended August 31, 2004 and August 31, 2003 (Restated)	6

		Notes to Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19

	Item 4.	Controls and Procedures	19

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	20

	Item 4.	Items Submitted to a Vote of Security Holders	20

	Item 6.	Exhibits and Reports on Form 8-K	20

SIGNATURES			22

CERTIFICATIONS			23

PART I—FINANCIAL INFORMATION

Item 1.— Financial Statements

ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS


	August 31, 2004		February 29, 2004
	(Unaudited)
Current assets:
Cash	$	42	$	52
Accounts receivable, net of allowance for doubtful accounts of $1,187 and $793		24,472		18,120
Inventory		32,721		27,833
Prepaid expenses and other		602		1,120
Deferred income taxes		1,683		1,167

Total current assets		59,520		48,292

Property and equipment, net of accumulated depreciation		4,398		4,461
Goodwill, net of accumulated amortization		5,258		5,258
Other assets		787		716

Total assets	$	69,963	$	58,727

The accompanying notes are an integral part

of these condensed financial statements.

ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY


	August 31, 2004			February 29, 2004
	(Unaudited)			(Restated)
Current liabilities:
Current maturities of long-term debt and capital lease obligations	$	398		$	407
Accounts payable		21,301			18,756
Interest derivative liabilities		233			—
Accrued expenses and other liabilities		5,408			3,248

Total current liabilities		27,340			22,411

Revolving line of credit		24,483			21,086
Long-term debt and capital lease obligations, less current maturities		1,447			1,645
Interest derivative liabilities		—			464
Deferred income taxes		246			63

Total long-term obligations		26,176			23,258

Shareholders’ equity:
Common stock		118			107
Additional paid-in capital		43,952			41,691
Unearned compensation—restricted stock		(2,077	)		—
Accumulated deficit		(25,546	)		(28,740	)

Total shareholders’ equity		16,447			13,058

Total liabilities and shareholders’ equity	$	69,963		$	58,727

The accompanying notes are an integral part

of these condensed financial statements.

ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended August 31,						Six months Ended August 31,
	2004			2003			2004			2003
				(Restated)						(Restated)
Sales	$	59,538		$	51,543		$	109,583		$	93,860
Cost of sales		45,889			40,195			84,776			73,207

Gross profit		13,649			11,348			24,807			20,653
Selling, general and administrative costs		10,134			8,795			19,381			17,028

Operating income		3,515			2,553			5,426			3,625
Interest expense		280			266			535			542
Interest derivative loss (gain)		7			(58	)		(23	)		21
Other non-operating (income)		(171	)		(122	)		(313	)		(226	)

Income before income taxes		3,399			2,467			5,227			3,288
Provision for income taxes:
Current		1,680			442			2,364			596
Deferred		(346	)		487			(331	)		646

Net income	$	2,065		$	1,538		$	3,194		$	2,046

Earnings per share:
Basic	$	.19		$	.14		$	.30		$	.19

Diluted	$	.19		$	.14		$	.30		$	.19

Weighted average shares outstanding:
Basic		10,681			10,681			10,681			10,681

Diluted		10,847			10,681			10,789			10,681

The accompanying notes are an integral part

of these condensed financial statements.

ACR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six months ended August 31,
	2004			2003
Operating activities:				(Restated)
Net income	$	3,194		$	2,046
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		473			513
Provision for doubtful accounts		394			354
Market value of interest derivative		(231	)		(198	)
Deferred income taxes		(331	)		645
Amortization of restricted stock compensation		194			—
Other		(1	)		(5	)
Changes in operating assets and liabilities:
Accounts receivable, net		(6,746	)		(6,033	)
Inventory		(4,888	)		(1,352	)
Prepaid expenses and other assets		447			(614	)
Accounts payable		2,545			3,019
Accrued expenses and other liabilities		2,159			1,401

Net cash (used in) operating activities		(2,791	)		(224	)

Investing activities:
Acquisition of property and equipment		(412	)		(231	)
Proceeds from disposition of assets		2			181

Net cash (used in) investing activities		(410	)		(50	)

Financing activities:
Net borrowings on revolving credit facility		3,254			428
Payments on long-term debt		(63	)		(217	)

Net cash provided by provided by financing activities		3,191			211

Net (decrease) in cash		(10	)		(63	)
Cash at beginning of year		52			104

Cash at end of period	$	42		$	41

Non-cash sale of subsidiaries’ inventory, property and equipment and other net assets	$	—		$	804

The accompanying notes are an integral part

of these condensed financial statements.

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 29, 2004 filed on Form 10-K/A 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 and six months ended August 31, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ended February 28, 2005.

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 detailed 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/A for the year ended February 29, 2004 and to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) Number 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123,” 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.

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

Three Months Ended
August 31,

Six Months Ended
August 31,

2004

2003

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents