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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-12490
ACR GROUP, INC.
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(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
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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 _____
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Shares of Common Stock outstanding at September 30, 2000 - 10,681,294.
-1-
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC, AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, February 29,
2000 2000
----------- -----------
(Unaudited)
Current assets:
Cash $ 129,453 $ 107,035
Accounts receivable, net 19,231,891 14,358,891
Inventory 22,070,280 18,445,097
Prepaid expenses and other 549,965 386,896
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 42,468,589 33,784,919
------------ ------------
Property and equipment, net of accumulated
depreciation 5,729,492 3,689,448
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 6,313,783 6,023,207
Other assets 482,737 370,929
------------ ------------
$ 55,967,601 $ 44,841,503
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,105,752 $ 1,788,255
Note payable - revolving line of credit 18,665,759 --
Accounts payable 19,761,585 12,182,803
Accrued expenses and other liabilities 2,222,642 1,741,710
------------ ------------
Total current liabilities 41,755,738 15,712,768
Long-term debt and capital lease obligations,
less current maturities 1,501,482 17,498,852
------------ ------------
Total liabilities 43,257,220 33,211,620
------------ ------------
Shareholders' equity:
Common stock 106,813 106,706
Additional paid-in capital 41,690,379 41,696,584
Accumulated deficit (29,086,811) (30,173,407)
------------ ------------
Total shareholders' equity 12,710,381 11,629,883
------------ ------------
$ 55,967,601 $ 44,841,503
============ ============
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 OPERATIONS
(Unaudited)
Six months ended Three months ended
August 31, August 31,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales $ 73,387,722 $ 71,313,108 $ 40,209,267 $ 38,107,190
Cost of sales 57,639,142 55,839,791 31,576,038 29,829,456
------------ ------------ ------------ ------------
Gross profit 15,748,580 15,473,317 8,633,229 8,277,734
Selling, general and
administrative expenses (13,610,563) (12,226,854) (7,157,112) (6,155,096)
Other operating income (expense) 43,121 (15,618) 8,614 (7,612)
------------ ------------ ------------ ------------
Operating income 2,181,138 3,230,845 1,484,731 2,115,026
Interest expense (1,151,117) (992,912) (607,594) (500,971)
Other non-operating income 175,855 186,279 95,054 98,882
------------ ------------ ------------ ------------
Income before income taxes 1,205,876 2,424,212 972,191 1,712,937
Provision for income taxes 119,280 157,940 85,930 98,610
------------ ------------ ------------ ------------
Net income $ 1,086,596 $ 2,266,272 $ 886,261 $ 1,614,327
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 10,671,103 10,664,969 10,671,571 10,670,634
Diluted 11,290,980 11,281,084 11,255,684 11,292,167
Earnings per common share:
Basic $ .10 $ .21 $ .08 $ .15
Diluted .10 .20 .08 .14
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
(Unaudited)
Six months ended
August 31,
--------------------------
2000 1999
------------ -----------
Operating activities:
Net income $ 1,086,596 $ 2,266,272
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 592,707 584,160
Other 4,182 2,603
Changes in operating assets and liabilities:
Accounts receivables (4,480,428) (3,839,600)
Inventory (3,262,612) 158,424
Prepaid expenses and other assets (498,110) 75,778
Accounts payable 6,782,644 1,278,599
Accrued expenses and other liabilities 465,808 585,431
----------- -----------
Net cash provided by operating activities 690,787 1,111,667
----------- -----------
Investing activities:
Acquisition of property and equipment (1,447,413) (502,988)
Acquisition of business, net of cash acquired (200,643) -
Proceeds from disposition of assets 7,700 15,539
----------- -----------
Net cash used in investing activities (1,640,356) (487,449)
----------- -----------
Financing activities:
Net borrowings on revolving credit facility 1,950,637 315,110
Payments on long-term debt (978,650) (938,879)
----------- -----------
Net cash provided by (used in) financing activities 971,987 (623,769)
----------- -----------
Net increase in cash 22,418 449
Cash at beginning of year 107,035 129,581
----------- -----------
Cash at end of period $ 129,453 $ 130,030
=========== ===========
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired 793,712 -
Fair value of liabilities assumed 817,915 -
Goodwill 404,203 -
Notes payable to sellers 152,000 -
Purchase of property and equipment under capital
leases and notes (net of cash) 968,612 156,013
The accompanying notes are an integral part
of these condensed financial statements.
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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 six-month periods ended August 31, 2000 is 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,
Colorado 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 August 31, 2000, the cost of such inventory held
in the bonded warehouses was $12,164,316.
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 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"). The maximum amount that may be borrowed under the revolving line
of credit is $25 million, including up to $1 million for letters of credit. The
maturity date of the credit facility is May 2003, with an automatic extension
for one-year periods unless either party gives notice of termination to the
other. At August 31, 2000, the Company had $18.7 million outstanding under the
facility.
Because of lower than expected net income in the first two quarters of
fiscal 2001, as of August 31, 2000, the company was not in compliance with a
financial covenant in its loan agreement with the Bank, and, to date, has not
either obtained a waiver from the Bank or negotiated a revision to the covenant.
Therefore, according to the strict provisions of the loan agreement, the
company's revolving line of credit is callable, and, as required by generally
accepted accounting principles, such indebtedness is classified as a current
liability in the balance sheet as of August 31, 2000. Management has initiated
discussions with the Bank concerning the financial covenants in the loan
agreement and expects such discussions toward a resolution of the situation to
continue during the third quarter of fiscal 2001. The Bank has given no
indication to date that it would intend to exercise any of its rights under the
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loan agreement in the event of default. So long as the company's ability to
access its revolving credit facility remains unimpaired, management believes
that cash flows from operations and the borrowing availability under the line of
credit will provide sufficient liquidity to meet the Company's working capital
requirements for existing and planned branch operations, debt service and
expected capital expenditures.
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5 - Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted earnings
per share:
Six Months Ended August 31, Three Months Ended August 31,
------------------------------ --------------------------------
2000 1999 2000 1999
------------- ------------- -------------- --------------
Numerator:
Net income $ 1,086,596 $ 2,266,272 $ 886,261 $ 1,614,327
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 1,086,596 $ 2,266,272 $ 886,261 $ 1,614,327
============= ============= ============== ==============
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,671,103 10,664,969 10,671,571 10,670,634
Effect of dilutive securities:
Employee stock options 32,521 25,120 36,220 19,912
Warrants 587,356 590,995 547,893 601,621
------------- ------------- -------------- --------------
Dilutive potential common shares 619,877 616,115 584,113 621,533
------------- ------------- -------------- --------------
Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 11,290,980 11,281,084 11,255,684 11,292,167
============= ============= ============== ==============
Basic earnings per share $ .10 $ .21 $ .08 $ .15
Dilutive earnings per share $ .10 $ .20 $ .08 $ .14
============= ============= ============== ==============
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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 Six-Month and Three-Month Periods
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Ended August 31, 2000 and August 31, 1999
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Six Months Ended August 31, 2000 Compared to 1999
- -------------------------------------------------
Net income decreased to $1,086,596 in the six-month period ended August 31,
2000 (fiscal 2001) from $2,266,272 in the six-month period ended August 31, 1999
(fiscal 2000), a decline of 52%. The change in results of operations in fiscal
2001 was attributable principally to both a decline in same store sales and the
costs associated with opening new branch operations. Since the end of the second
quarter of fiscal 2000, the company has opened 10 branch operations and is
scheduled to open two more branches by November 2000. Such new branches
typically incur costs prior to opening for personnel and preparing for business
operation, and subsequently for 12 to 18 months as sales ramp up to a breakeven
volume. In the six-month period ended August 31, 2000, aggregate operating
losses for the 12 branches referred to above were approximately $360,000.
Consolidated sales increased 3% in the six-month period ended August 31,
2000, compared to the same period in 1999. Same store sales for branches open
more than one year at the beginning of the fiscal year (March 1) decreased 2% in
the six-month period ended August 31, 2000, compared to an increase of 9% in
same store sales in the same period of 1999. The decline in same store sales in
2000 occurred across several geographic areas where the company operates, with
only Florida and California attaining significant increases in same store sales.
In particular, the company's operations in Colorado, New Mexico and Nevada,
which have a relatively large concentration of sales to the new construction
segment of the market, experienced a 9% decline in same store sales in 2000.
The Company's gross margin percentage on sales was 21.5% for the six-month
period ended August 31, 2000, compared to 21.7% in 1999, but same store gross
margin percentage increased from 21.7% in 1999 to 21.8% in 2000. The company
engages in continuous efforts to manage its gross margin percentage by refining
customer pricing strategies and negotiating national buying arrangements. The
gross margin percentage at new branch operations is usually lower than at
established branches because of competitive efforts to obtain initial customers.
Selling, general and administrative ("SG&A") expenses increased 11% in the
six-month period ended August 31, 2000 compared to the same period of 1999.
Expressed as a percentage of sales, SG&A expenses increased from 17.1% in 1999
to 18.5% in 2000. Excluding the effect of branches opened or acquired after the
end of the second quarter of fiscal 2000, SG&A expenses for the six-month period
ended August 31, 2000 were 18.3% of sales. The increase in SG&A expenses as a
percentage of sales in fiscal 2001 is otherwise generally attributable to the
combined effect of increases in overhead costs together with the decline in same
store sales described above.
Interest expense increased 16% from 1999 to 2000 as a result of both higher
interest rates on the Company's variable rate debt, and greater average
outstanding borrowings under the Company's working capital line of credit. As a
percentage of sales, interest expense has increased from 1.4% in 1999 to 1.6% in
2000. The additional borrowings were used to fund the initial costs and working
capital requirements of new branch operations. Other non-operating income, which
consists primarily of finance charge collections, decreased 5% from 1999 to
2000.
-8-
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 August 31, 2000 Compared to 1999
- ---------------------------------------------------
Net income decreased to $886,261 in the quarter ended August 31, 2000 from
$1,614,327 in the quarter ended August 31, 1999, a decline of 45%. Such decrease
in results of operations was attributable to the same factors as described above
with respect to the six-month period ended August 31, 2000. In the quarter ended
August 31, 2000, aggregate operating losses of the new branches were
approximately $275,000.
Sales increased 6% from the second quarter of fiscal 2000 to fiscal 2001,
with same store sales decreasing 1% for branches open for more than one year at
the beginning of the quarter. The quarterly sales decline was most pronounced in
the Nevada and Tennessee market areas, whereas the company's operations in
Florida and California each attained double-digit increases in same store sales.
The Company's gross margin percentage on sales was 21.5% for the quarter
ended August 31, 2000, compared to 21.7% in 1999, but same store gross margin
percentage increased to 21.8%. To date, management has generally declined to
reduce margins in 2000 in order to gain incremental sales.
SG&A expenses as a percentage of sales increased from 16.2% in 1999 to
17.8% in 2000, generally because of the shortfall in planned sales during the
quarter ended August 31, 2000. Excluding the effect of branches opened or
acquired after the end of the second quarter of fiscal 2000, SG&A expenses for
the six-month period ended August 31, 2000 were 17.3% of sales. Interest expense
increased 21% from 1999 to 2000 as a result of higher average interest rates on
the Company's variable rate debt and an increase in borrowings under the
Company's working capital line of credit.
Liquidity and Capital Resources
- -------------------------------
Current assets increased 26% from February 29, 2000 to August 31, 2000,
compared to an 11% increase during the same period in 1999, principally because
of the inventory stocked at the new branches. Gross accounts receivable
represented 45 days of gross sales as of both August 31, 2000 and 1999,
reflecting a continuous focus on credit management and aggressive collection of
delinquent accounts. Inventory from the end of February to the end of August
increased by 20% in 2000, compared to a decrease of 1% in 1999. Approximately
60% of the inventory increase in 2000 is located at the branches opened in the
current fiscal year. Lower than expected sales in the first six months of fiscal
2001 resulted in increased inventories in Texas, and management has reduced
ordering in the third quarter to bring inventory levels in line with sales
expectations.
In May 2000, The Company amended its loan agreement with a commercial bank
("Bank") in order to expand its credit facilities. The new credit facilities
include a $25 million revolving line of credit, a $1 million capital expenditure
term loan facility, a $4 million term loan facility for the purchase of real
estate and improvements, and an acquisition line of credit of up to $5 million.
Borrowings under the revolving line of credit are limited to certain specified
percentages of accounts receivable and inventory and, at August 31, 2000, the
Company had available credit of $4.8 million under the revolver. At August 31,
2000, no funds were borrowed under either of the new term loan facilities or the
acquisition line of credit. At August 31, 2000, the outstanding balance on both
the revolving credit line and the term loan facilities bear interest at the
prime
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rate (presently 9.5%), adjusted monthly.
Because of lower than expected net income in the first two quarters of
fiscal 2001, as of August 31, 2000, the company was not in compliance with a
financial covenant in its loan agreement with the Bank, and, to date, has not
either obtained a waiver from the Bank or negotiated a revision to the covenant.
Therefore, according to the strict provisions of the loan agreement, the
company's revolving line of credit is callable, and, as required by generally
accepted accounting principles, such indebtedness is classified as a current
liability in the balance sheet as of August 31, 2000. Management has initiated
discussions with the Bank concerning the financial covenants in the loan
agreement and expects such discussions toward a resolution of the situation to
continue during the third quarter of fiscal 2001. The Bank has given no
indication to date that it would intend to exercise any of its rights under the
loan agreement in the event of default. So long as the company's ability to
access its revolving credit facility remains unimpaired, management believes
that cash flows from operations and the borrowing availability under the line of
credit will provide sufficient liquidity to meet the Company's working capital
requirements for existing and planned branch operations, debt service and
expected capital expenditures.
The Company has approximately $29 million in tax loss carryforwards which
expire by fiscal 2003. Such operating loss carryforwards will substantially
limit the Company's federal income tax liabilities in the near future.
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.
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 achieve year 2000 compliance were less than $100,000
and were expensed as incurred.
Upon transitioning to Year 2000 in January 2000, the Company did not
experience any related problems in its internal operations. To date, the Company
has experienced no adverse effects as a result of suppliers, customers or
service providers failing to adequately address the Year 2000 issue and further
received assurances from its most significant suppliers that they were able to
meet customer demands.
-10-
While management believes that it took adequate steps to address the Year
2000 issue, 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.
Recently Issued Accounting Standards
- ------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by Statement of
Financial Accounting Standard No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FAS Statement No.
133" ("SFAS 137") which is effective for fiscal years beginning after June 15,
2000, requires all derivatives to be recognized at fair value on the balance
sheet. The Company plans to adopt SFAS 133 no later than February 28, 2001. The
change is not expected to have a significant effect on the Company's financial
statements.
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.
-11-
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
August 31, 2000 the Company had $18.7 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.
-12-
PART II - OTHER INFORMATION
Item 4. - Results of Votes of Security Holders
At the Annual Meeting of Shareholders on August 17, 2000, the shareholders
of the Company voted on and approved the following issue:
Election of Directors for a term of one year expiring at the next Annual
Meeting of Shareholders:
Shares Shares
For Withheld
--------- --------
Anthony R. Maresca 9,014,739 49,210
Ronald T. Nixon 9,042,764 21,185
Roland H. St. Cyr 9,028,004 35,945
Alex Trevino, Jr. 9,040,579 23,370
A. Stephen Trevino 8,984,718 79,231
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits. Financial Data Schedule 27.1
(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.
October 16, 2000 /s/ Anthony R. Maresca
- -------------------------------- -------------------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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