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, 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.
- --------------------------------------------------------------------------------
(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
- ---------------------------------------------- --------------------------------
(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 September 30, 1999 - 10,670,634.
1
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, February 28,
1999 1999
------------- -------------
(Unaudited)
Current assets:
Cash $ 130,030 $ 129,581
Accounts receivable, net 18,050,640 14,205,827
Inventory 18,290,752 18,449,176
Prepaid expenses and other 425,037 437,860
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 37,383,459 33,709,444
------------ ------------
Property and equipment, net of accumulated
depreciation 3,783,902 3,695,862
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 6,131,580 6,239,953
Other assets 379,970 484,370
------------ ------------
$ 48,651,911 $ 45,102,629
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,945,957 $ 1,550,218
Accounts payable 16,234,296 14,955,698
Accrued expenses and other liabilities 2,175,120 1,589,688
------------ ------------
Total current liabilities 20,355,373 18,095,604
Long-term debt and capital lease obligations,
less current maturities 16,633,016 17,615,775
------------ ------------
Total liabilities 36,988,389 35,711,379
------------ ------------
Shareholders' equity:
Common stock 106,706 106,593
Additional paid-in capital 41,690,584 41,684,697
Accumulated deficit (30,133,768) (32,400,040)
------------ ------------
Total shareholders' equity 11,663,522 9,391,250
------------ ------------
$ 48,651,911 $ 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)
Six months ended Three months ended
August 31, August 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ------------ ------------ -----------
Sales $71,313,108 $ 64,994,434 $ 38,107,190 $36,842,700
Cost of sales 55,839,791 51,667,113 29,829,456 29,333,110
----------- ------------ ------------ -----------
Gross profit 15,473,317 13,327,321 8,277,734 7,509,590
Selling, general and
administrative expenses (12,226,854) (10,703,963) (6,155,096) (5,713,706)
Other operating income (expense) (15,618) 47,171 (7,612) 6,194
----------- ------------ ------------ -----------
Operating income 3,230,845 2,670,529 2,115,026 1,802,078
Interest expense (992,912) (1,024,319) (500,971) (522,115)
Other non-operating income 186,279 106,262 98,882 57,291
----------- ------------ ------------ -----------
Income before income taxes 2,424,212 1,752,472 1,712,937 1,337,254
Provision for income taxes 157,940 100,600 98,610 69,900
----------- ------------ ------------ -----------
Net income $ 2,266,272 $ 1,651,872 $ 1,614,327 $ 1,267,354
=========== ============ ============ ===========
Weighted average shares
outstanding:
Basic 10,664,969 10,634,185 10,670,634 10,634,303
Diluted 11,281,084 11,449,674 11,292,167 11,402,246
Earnings per common share:
Basic $ .21 $ .16 $ .15 $ .12
Diluted .20 .14 .14 .11
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)
Six months ended
August 31,
-------------------------
1999 1998
----------- -----------
Operating activities:
Net income $ 2,266,272 $ 1,651,872
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 584,160 564,695
Other 2,603 57,976
Changes in operating assets and liabilities:
Accounts receivable (3,839,600) (4,430,568)
Inventory 158,424 (1,322,858)
Prepaid expense and other assets 75,778 156,436
Accounts payable 1,278,599 5,247,903
Accrued expenses and other liabilities 585,431 416,033
----------- -----------
Net cash provided by operating activities 1,111,667 2,341,489
----------- -----------
Investing activities:
Acquisition of property and equipment (502,988) (333,898)
Proceeds from disposition of assets 15,539 63,050
----------- -----------
Net cash used in investing activities (487,449) (270,848)
----------- -----------
Financing activities:
Net borrowings (repayments) on revolving credit
facility 315,110 (956,747)
Payment of other long-term debt (938,879) (1,107,096)
----------- -----------
Net cash used in financing activities (623,769) (2,063,843)
----------- -----------
Net increase in cash 449 6,798
Cash at beginning of year 129,581 90,000
----------- -----------
Cash at end of period $ 130,030 $ 96,798
=========== ===========
Schedule of non-cash investing and financing
activities:
Purchase of equipment under capital leases
(net of cash paid) 156,013 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 six-month periods ended August 31, 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
Memphis, 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, 1999, the cost of such inventory held in the
bonded warehouses was $6,885,726.
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 August 31, 1999, the Company had $15.9 million outstanding
under this credit facility and a maturity date set for August 31, 2000. In
October 1999, the Bank agreed to extend the maturity date of the Company's
credit facility by three months to November 30, 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:
Six Months Ended August 31, Three Months Ended August 31,
------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
Numerator:
Net income $ 2,266,272 $ 1,651,872 $ 1,614,327 $ 1,267,354
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 2,266,272 $ 1,651,872 $ 1,614,327 $ 1,267,354
============= ============= ============= =============
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,664,969 10,634,185 10,670,634 10,634,303
Effect of dilutive securities:
Employee stock options 25,120 60,581 19,912 56,033
Warrants 590,995 754,908 601,621 711,910
------------- ------------- ------------- -------------
Dilutive potential common shares 616,115 815,489 621,533 767,943
------------- ------------- ------------- -------------
Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 11,281,084 11,449,674 11,292,167 11,402,246
============= ============= ============= =============
Basic earnings per share $ .21 $ .16 $ .15 $ .12
Dilutive earnings per share $ .20 $ .14 $ .14 $ .11
============= ============= ============= =============
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 Six-Month and Three-Month Periods
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Ended August 31, 1999 and August 31, 1998
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Six Months Ended August 31, 1999 Compared to 1998
- -------------------------------------------------
Net income increased to $2,266,272 in the six-month period ended August 31,
1999 (fiscal 2000) from $1,651,872 in the six-month period ended August 31, 1998
(fiscal 1999), an increase of 37%. The improvement in results of operations in
fiscal 2000 was generally attributable to a significant increase in same store
sales at both the beginning and end of the six-month period and a substantial
increase in the Company's gross margin percentage.
Consolidated sales increased 10% in the six-month period ended August 31,
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 9% in the
six-month period ended August 31, 1999, compared to an increase of 13% 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
until late in the Company's second fiscal quarter.
The Company's gross margin percentage on sales was 21.7% for the six-month
period ended August 31, 1999, compared to 20.5% in 1998. The higher gross margin
percentage in 1999 was 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
six-month period ended August 31, 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 16.5% in 1998 to 17.1% in
1999. Such increase largely resulted from the inability to achieve expected
levels of sales in the second quarter 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 has continued to provide a minimal level of service, and management
is negotiating with the customer to amicably terminate the relationship,
including a resolution of unbilled energy management services for prior periods.
7
Interest expense declined 3% from 1998 to 1999 as a result of lower average
interest rates on the Company's variable rate debt. As a percentage of sales,
interest expense has declined from 1.6% in 1998 to 1.4% 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 75% from 1998
to 1999, as the Company continued to more assertively enforce 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 August 31, 1999 Compared to 1998
- ---------------------------------------------------
Net income increased to $1,614,327 in the quarter ended August 31, 1999
from $1,267,354 in the quarter ended August 31, 1998, an increase of 27%. The
improvement in results of operations in the second quarter of fiscal 2000 was
principally attributable to the Company's successful effort to increase its
gross margin percentage on sales.
Sales increased 3% from the second quarter of fiscal 1999 to fiscal 2000,
with same store sales increasing 1% for branches open for more than one year at
the beginning of the quarter. The moderate summer temperatures that prevailed in
the Company's market areas for most of the second quarter of fiscal 2000
restricted demand for air conditioning products.
The Company's gross margin percentage on sales was 21.7% for the quarter
ended August 31, 1999, compared to 20.4% in 1998. As described above, the
improvement in the gross margin percentage in the second quarter was
attributable to initiatives undertaken by management. In support of this
initiative, management also generally declined to reduce margins in 1999 in
order to gain incremental sales when it became apparent that weather conditions
would hamper sales growth.
SG&A expenses as a percentage of sales increased from 15.5% in 1998 to
16.2% in 1999, because of the shortfall in expected sales during the quarter
ended August 31, 1999. Interest expense decreased 4% from 1998 to 1999 as a
result of lower average interest rates on the Company's variable rate debt and a
reduction in the Company's outstanding subordinated indebtedness.
Liquidity and Capital Resources
- -------------------------------
Current assets increased 11% from February 28, 1999 to August 31, 1999,
compared to an 18% increase during the same period in 1998. Gross accounts
receivable represented 45 days of gross sales as of August 31, 1999, compared to
46 days of gross sales in receivables at August 31, 1998, reflecting a
continuous focus on credit management and aggressive collection of delinquent
accounts. Inventory from the end of February to the end of August decreased by
1% in 1999, compared to an increase of 8% in 1998, as the Company curbed its
replenishment of certain merchandise in 1999 as a result of the lower than
expected second quarter sales.
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 August 31, 1999, the
8
Company had available credit of $1.8 million and $200,000 under the revolving
credit line and the term loan facility, respectively. At August 31, 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 October 1999, the Bank agreed to extend the maturity
date of the Company's credit facilities by three months to November 30, 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 expects to begin negotiating with both the Bank and other potential
lenders to expand its credit facilities and further extend the maturity date,
and believes it can conclude such negotiations before the end of December 1999.
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. Although management has engaged in discussions with
several potential investors or lenders, the Company has no commitment for
additional financing and cannot predict whether such financing would be
available on acceptable terms or when such additional financing may materialize.
Management is also reviewing the suitability of several acquisition
opportunities, but has not entered into letters of intent to acquire any
companies. 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
- ---------------
The Company has addressed its state of readiness to deal with the problem
commonly known as the Year 2000 issue. With respect to its own information
systems, the Company has installed an upgrade to its existing integrated
application software such that the software is now fully Year 2000 compliant.
Staff of the Company accomplished such modifications. One of the Company's
subsidiaries, which does not utilize the Company's integrated software, has
purchased new computer hardware and has substantially completed testing
migration of its computer programs to the new hardware in order to fully
accommodate Year 2000. The subsidiary contracted with third-party vendors to
accomplish such implementation. The Company does not believe that it has a
material exposure to Year 2000 in elements of its own operations other than its
information systems, but management is continually updating its assessment of
such elements. 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, and
the Company does not expect to incur material future costs in connection with
its ongoing efforts.
The Company has informally discussed Year 2000 preparedness with its most
significant suppliers and has obtained assurances that such suppliers do not
expect any disruption in their ability to fulfill customer orders as a result of
Year 2000 issues. To date, the Company has not undertaken to assess the Year
2000 preparedness of its customers. The Company does not have any
9
interconnectivity with its customers' computer systems, and no customer
represents more than 1% of consolidated sales. Management may initiate
discussions during the remainder of 1999 with its most significant customers
concerning their Year 2000 preparedness, but does not believe that customers'
lack of preparedness would have a material adverse effect on the Company's sales
or results of operations.
The Company has not developed a specific contingency plan to address a
worst case scenario dealing with lack of Year 2000 preparedness. Although
management is confident that the Company's own internal systems will be fully
Year 2000 compliant, the Company's branch operations would be able to conduct
business using manual systems for an indefinite period of time if the Company's
automated information systems were unexpectedly disabled. Management believes
that a Year 2000 contingency plan would principally address issues relating to
the potential inability of suppliers, service providers or customers to
satisfactorily address their own Year 2000 issues. The Company expects to
continually assess the Year 2000 preparedness of such parties and, if
circumstances dictate, may undertake specific contingency plans.
While management believes that it has taken adequate steps to address the
Year 2000 issue, there can be no assurance that the inability of either
significant business partners or key parties that provide the country's business
and public service infrastructure to adequately address the Year 2000 issue
would not have a material adverse impact on the Company.
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.
10
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, 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.
11
PART II - OTHER INFORMATION
Item 4. - Results of Votes of Security Holders
At the Annual Meeting of Shareholders on August 19, 1999, 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 9,703,254 13,350
Ronald T. Nixon 9,703,354 13,250
Roland H. St. Cyr 9,690,854 25,750
Alex Trevino, Jr. 9,699,754 16,850
A. Stephen Trevino 9,703,154 13,450
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.
October 15, 1999 /s/ Anthony R. Maresca
- -------------------------------- ----------------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
12