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 November 30, 1999
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.
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(Exact name of registrant as specified in its charter)
Texas 74-2008473
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Wilcrest Drive, Suite 440, Houston, Texas 77042
- ---------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
(713) 780-8532
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(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 December 31, 1999 - 10,670,634.
1
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, February 28,
1999 1999
------------ ------------
(Unaudited)
Current assets:
Cash $ 155,967 $ 129,581
Accounts receivable, net 14,893,062 14,205,827
Inventory 18,687,643 18,449,176
Prepaid expenses and other 390,727 437,860
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 34,614,399 33,709,444
------------ ------------
Property and equipment, net of accumulated
depreciation 3,806,049 3,695,862
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 6,077,394 6,239,953
Other assets 387,618 484,370
------------ ------------
$ 45,858,460 $ 45,102,629
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,907,540 $ 1,550,218
Accounts payable 13,186,654 14,955,698
Accrued expenses and other liabilities 2,088,527 1,589,688
------------ ------------
Total current liabilities 17,182,721 18,095,604
Long-term debt and capital lease obligations,
less current maturities 16,627,893 17,615,775
------------ ------------
Total liabilities 33,810,614 35,711,379
------------ ------------
Shareholders' equity:
Common stock 106,706 106,593
Additional paid-in capital 41,693,584 41,684,697
Accumulated deficit (29,752,444) (32,400,040)
------------ ------------
Total shareholders' equity 12,047,846 9,391,250
------------ ------------
$ 45,858,460 $ 45,102,629
============ ============
The accompanying notes are an integral part
of these condensed financial statements.
2
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended Three months ended
November 30, November 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
Sales $100,511,288 $ 92,670,721 $ 29,198,180 $27,676,287
Cost of sales 78,378,133 73,406,907 22,538,342 21,739,794
------------ ------------ ------------ -----------
Gross profit 22,133,155 19,263,814 6,659,838 5,936,493
Selling, general and administrative expenses (18,031,129) (15,855,084) (5,804,275) (5,151,121)
Other operating income (expense) (17,401) 47,193 (1,783) 22
------------ ------------ ------------ -----------
Operating income 4,084,625 3,455,923 853,780 785,394
Interest expense (1,482,460) (1,508,266) (489,548) (483,947)
Other non-operating income 271,931 168,824 85,652 62,562
------------ ------------ ------------ -----------
Income before income taxes 2,874,096 2,116,481 449,884 364,009
Provision for income taxes 226,500 135,345 68,560 34,745
------------ ------------ ------------ -----------
Net income $ 2,647,596 $ 1,981,136 $ 381,324 $ 329,264
============ ============ ============ ===========
Weighted average shares outstanding:
Basic 10,666,857 10,634,224 10,670,634 10,634,303
Diluted 11,274,243 11,397,177 11,260,561 11,292,184
Earnings per common share:
Basic $ .25 $ .19 $ .04 $ .03
Diluted .23 .17 .03 .03
The accompanying notes are an integral part
of these condensed financial statements.
3
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
November 30,
--------------------------
1999 1998
----------- -----------
Operating activities:
Net income $ 2,647,596 $ 1,981,136
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 864,042 840,308
Other 8,682 35,539
Changes in operating assets and liabilities:
Accounts receivable (682,021) (2,910,837)
Inventory (238,467) (417,086)
Prepaid expense and other assets 84,405 97,410
Accounts payable (1,769,043) (103,898)
Accrued expenses and other liabilities 498,838 484,799
----------- -----------
Net cash provided by operating activities 1,414,032 7,371
----------- -----------
Investing activities:
Acquisition of property and equipment (737,578) (514,608)
Proceeds from disposition of assets 17,242 73,677
----------- -----------
Net cash used in investing activities (720,336) (440,931)
----------- -----------
Financing activities:
Net borrowings on revolving credit facility 602,069 1,624,343
Payment of other long-term debt (1,269,379) (1,126,115)
----------- -----------
Net cash (used in) provided by financing activities (667,310) 498,228
----------- -----------
Net increase in cash 26,386 64,668
Cash at beginning of year 129,581 90,000
----------- -----------
Cash at end of period $ 155,967 $ 154,668
=========== ===========
Schedule of non-cash investing and financing
activities:
Purchase of equipment under capital leases
(net of cash paid) 196,966 67,789
The accompanying notes are an integral part
of these condensed financial statements.
4
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 - Basis of Presentation
---------------------
The interim financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normally
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. The results of operations
for the three-month and nine-month periods ended November 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
Substantially all inventories represent finished goods held for sale.
2 - Contingent Liabilities
----------------------
The Company has an arrangement with an HVACR equipment manufacturer and a
field warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of the Company's operations in Georgia and
Tennessee, with payment due only when products are sold. Such inventory is
accounted for as consigned merchandise and is not recorded on the Company's
balance sheet. As of November 30, 1999, the cost of such inventory held in the
bonded warehouses was $9,961,604.
The terms of the consignment agreement with the supplier further provide
that merchandise not sold within a specified period of time must be purchased by
the Company. The Company believes that substantially all consigned merchandise
will be sold in the ordinary course of business before any purchase obligation
is incurred.
3 - Income Taxes
------------
The provision for income taxes consists principally of federal alternative
minimum taxes and state income taxes. The Company has previously unbenefited
net operating loss and tax credit carryforwards which offset substantially all
of its federal taxable income.
4 - Debt
----
The Company has a revolving line of credit arrangement with a commercial
bank ("Bank"). At November 30, 1999, the Company had $15.9 million outstanding
under this credit facility and a maturity date set for November 30, 2000. In
January 2000, the Bank agreed to extend the maturity date of the Company's
credit facility by one day to December 1, 2000, thus enabling the Company to
continue to classify such debt as long-term.
5
5 - Earnings per Share
------------------
The following table sets forth the computation of basic and diluted
earnings per share:
Nine Months Ended November 30, Three Months Ended November 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- --------------
Numerator:
Net income $ 2,647,596 $ 1,981,136 $ 381,324 $ 329,264
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 2,647,596 $ 1,981,136 $ 381,324 $ 329,264
============== =============== ============== ==============
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,666,857 10,634,224 10,670,634 10,634,303
Effect of dilutive securities:
Employee stock options 22,878 56,590 18,395 48,609
Warrants 584,508 706,363 571,532 609,272
-------------- --------------- -------------- --------------
Dilutive potential common shares 607,386 762,953 589,927 657,881
-------------- --------------- -------------- --------------
Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 11,274,243 11,397,177 11,260,561 11,292,184
============== =============== ============== ==============
Basic earnings per share $ .25 $ .19 $ .04 $ .03
Dilutive earnings per share $ .23 $ .17 $ .03 $ .03
============== =============== ============== ==============
6
ACR GROUP, INC. AND SUBSIDIARIES
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Results of Operations for the Nine-Month and Three-Month Periods
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Ended November 30, 1999 and November 30, 1998
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Nine Months Ended November 30, 1999 Compared to 1998
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Net income increased to $2,647,596 in the nine-month period ended November
30, 1999 (fiscal 2000) from $1,981,136 in the nine-month period ended November
30, 1998 (fiscal 1999), an increase of 34%. The improvement in results of
operations in fiscal 2000 is generally attributable to an increase in same store
sales and a substantial increase in the Company's gross margin percentage.
Consolidated sales increased 8% in the nine-month period ended November 30,
1999, compared to the same period in 1998. Same store sales for branches open
for more than one year at the beginning of the fiscal year increased 7% in the
nine-month period ended November 30, 1999, compared to an increase of 12% in
same store sales in the same period of 1998. Comparisons of both total and same
store sales are impacted by contrasting weather conditions in 1998 and 1999.
Because the Company's operations are geographically concentrated in the sunbelt,
weather conditions that affect the relative demand for air conditioning products
during the cooling season may significantly impact the Company's sales. In
1998, weather conditions in much of the sunbelt were drier and warmer in the
early summer, resulting in increased demand for air conditioning products. In
contrast, summer temperatures in the same region in 1999 were unusually
moderate.
The Company's gross margin percentage on sales was 22% for the nine-month
period ended November 30, 1999, compared to 20.8% in 1998. The higher gross
margin percentage in 1999 is a result of proactive, ongoing efforts to both
refine customer pricing strategies and reduce the net purchase cost of a
significant portion of inventories through national buying arrangements. In
addition, the Company's sheet metal fabrication operation benefited from reduced
commodity steel prices while maintaining its sale prices of finished goods.
Selling, general and administrative ("SG&A") expenses increased 14% in the
nine-month period ended November 30, 1999 compared to the same period of 1998,
because of the costs associated with new branch operations and personnel
employed to support the Company's internal growth goals. Expressed as a
percentage of sales, SG&A expenses increased from 17.1% in 1998 to 17.9% in
1999. Such increase has largely resulted from the inability to achieve expected
levels of sales in the second and third quarters of fiscal 2000.
Other operating income declined from 1998 to 1999 because of an
interruption in billings to the Company's remaining energy services customer.
The Company reached an understanding with the customer to terminate services at
the end of October 1999, with the customer agreeing to make a contract
termination payment to the Company and to provide utility bills necessary for
the Company to invoice the customer through the termination date.
7
Interest expense declined 2% from 1998 to 1999 as a result of both lower
average interest rates on the Company's variable rate debt and a reduction in
debt other than the Company's revolving credit facility. As a percentage of
sales, interest expense has declined from 1.6% in 1998 to 1.5% in 1999, as the
Company has used internally generated cash flow to support much of the working
capital required to support the growth in sales volume. Other non-operating
income, which consists primarily of finance charge collections, increased 55%
from 1998 to 1999, as the Company has more assertively enforced this element of
its credit policy to accelerate collection of receivables.
The current provision for income taxes consists principally of federal
alternative minimum taxes and state income taxes. As a result of the Company's
substantial tax loss carryforwards, the Company has minimal liability for
Federal income taxes. See Liquidity and Capital Resources, below.
Three Months Ended November 30, 1999 Compared to 1998
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Net income increased to $381,324 in the quarter ended November 30, 1999
from $329,264 in the quarter ended November 30, 1998, an increase of 16%. The
improvement in results of operations in the third quarter of fiscal 2000 was
principally attributable to the Company's successful effort to increase its
gross margin percentage on sales.
Sales increased 5% from the third quarter of fiscal 1999 to fiscal 2000,
with same store sales increasing 3% for branches open for more than one year at
the beginning of the quarter. The moderate temperatures that prevailed during
most of the second quarter of fiscal 2000 continued into the fall and delayed
the commencement of sales of heating products.
The Company's gross margin percentage on sales was 22.8% for the quarter
ended November 30, 1999, compared to 21.4% in 1998. As described above, the
improvement in the gross margin percentage in the third quarter was attributable
to initiatives undertaken by management. Rebates from suppliers increased
significantly in the third quarter of fiscal 2000 as the Company attained
certain purchase volume goals that assured higher graduated levels of rebates.
SG&A expenses as a percentage of sales increased from 18.6% in 1998 to
19.9% in 1999, because of the shortfall in expected sales during the quarter
ended November 30, 1999 and costs associated with opening a new branch in
Nashville in November 1999. Interest expense increased 1% from 1998 to 1999
because of higher average outstanding balances on the Company's revolving credit
facility.
Liquidity and Capital Resources
- -------------------------------
Working capital increased 12% from February 28, 1999 to November 30, 1999,
compared to a 20% increase during the same period in 1998. Gross accounts
receivable represented 52 days of gross sales as of both November 30, 1999 and
1998. Inventory from the end of February to the end of November increased by 1%
in 1999, compared to an increase of 2% in 1998.
The Company has credit facilities with a commercial bank ("Bank") which
include an $18 million revolving line of credit and a $500,000 term loan
facility for the purchase of capital equipment. At November 30, 1999, the
Company had available credit of $ 1.5 million and $224,000 under the revolving
8
credit line and the term loan facility, respectively. At November 30, 1999, $14
million of the outstanding balance on the revolving credit line bore interest at
LIBOR plus 3.00%, with the remainder of the revolving credit line and the
outstanding balance on the term loan facility bearing interest at the Bank's
prime rate plus 1/2%. In January 2000, the Bank agreed to extend the maturity
date of the Company's credit facilities to December 1, 2000, so that the Company
could continue to classify the outstanding balance of the revolving credit line
as a non-current liability in its financial statements. Management is presently
considering proposals from both the Bank and other potential lenders to expand
its credit facilities and further extend the maturity date, and believes that a
commitment will be obtained before the end of fiscal 2000. Management believes
that cash flows from operations and the borrowing availability under the
existing revolving credit facility will provide sufficient liquidity to meet the
Company's normal working capital requirements, existing debt service and
expected capital expenditures.
Subject to limitations set forth in its loan agreement with the Bank, funds
available under the Company's revolving credit facility may also be utilized to
finance acquisitions. At any time, management is usually engaged in informal
discussions with potential sellers concerning acquisition opportunities. As of
November 30, 1999, the Company had a letter of intent pending to acquire one
company and expects to enter into a definitive agreement for such acquisition
before the end of fiscal 2000. Such acquisition, if completed, is not expected
to be material to the Company's financial condition or results of operations.
The Company's ability to consummate a significant acquisition would be dependent
upon obtaining additional financing.
The Company has approximately $29 million in tax loss carryforwards and
$0.8 million in tax credit carryforwards. Such operating loss and tax credit
carryforwards will substantially limit the Company's federal income tax
liabilities in the near future.
Year 2000 Issue
Prior to December 31, 1999, the Company undertook various measures to
address its state of readiness to deal with the problem commonly known as the
Year 2000 issue. Such measures included installing an upgrade to its existing
integrated application software and, at one of the Company's subsidiaries that
does not use the Company's integrated software, purchasing new computer hardware
and migrating the subsidiary's computer programs to the new hardware. The costs
incurred by the Company to date to achieve year 2000 compliance have been less
than $100,000 and have been expensed as incurred.
Upon transitioning to Year 2000 in January 2000, the Company experienced no
related problems in any of its internal operations. To date, the Company also
has not experienced any adverse effects as a result of suppliers, customers or
service providers failing to adequately address the Year 2000 issue. The
Company has obtained assurances from its most significant suppliers that such
suppliers have prepared their own operations to handle the Year 2000 issue and,
to date, the Company is not aware that any of its suppliers has experienced
difficulty in fulfilling customer orders as a result of the Year 2000 issue.
The Company did not undertake to assess the Year 2000 preparedness of its
customers, as the Company does not have any interconnectivity with its
customers' computer systems and no customer represents more than 2% of
9
consolidated sales. However, the Company is not aware that the operations of
any significant customer have been materially adversely affected by the Year
2000 issue.
While management believes that it took adequate steps to address the Year
2000 issue, and there have been no reports to date of significant problems
related to Year 2000 among the Company's suppliers, customers and service
providers, there can be no assurance that such problems may not arise in the
future. Should Year 2000 issues ultimately have a material adverse impact on
significant business partners or key parties that provide the country's business
and public service infrastructure, the Company's operations could be similarly
affected.
Safe Harbor Statement
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 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. The Company's
expectations and beliefs are expressed in good faith and are believed by the
Company to have a reasonable basis, but there can be no assurance that
management's 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. In
addition to other factors and matters discussed elsewhere herein, the following
are important matters that, in the view of the Company, could cause actual
results to differ materially from those discussed in the forward-looking
statements: the ability of the Company to continue to expand through
acquisitions, the availability of debt or equity capital to fund the Company's
expansion program, unusual weather conditions, the effects of competitive
pricing and general economic factors.
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, as its option, fix the interest rate for
certain borrowings based on a spread over LIBOR for 30 days to 6 months. At
November 30, 1999 the Company had $15.9 million outstanding under its senior
credit facility. The Company's objective in maintaining these variable rate
borrowings is the flexibility obtained regarding lower overall costs as compared
with fixed-rate borrowings.
10
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K. None.
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.
January 14, 2000 /s/ Anthony R. Maresca
- -------------------------------- --------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
11