<PAGE> 1
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, 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
----------------------------------------------------
(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, 1999 - 10,670,634.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31, February 28,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 131,040 $ 129,581
Accounts receivable, net 17,157,248 14,205,827
Inventory 20,497,712 18,449,176
Prepaid expenses and other 409,226 437,860
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 38,682,226 33,709,444
------------ ------------
Property and equipment, net of accumulated
depreciation 3,850,443 3,695,862
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 6,185,767 6,239,953
Other assets 428,313 484,370
------------ ------------
$ 50,119,749 $ 45,102,629
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,638,874 $ 1,550,218
Accounts payable 18,648,905 14,955,698
Accrued expenses and other liabilities 1,631,212 1,589,688
------------ ------------
Total current liabilities 21,918,991 18,095,604
Long-term debt and capital lease obligations,
less current maturities 18,154,563 17,615,775
------------ ------------
Total liabilities 40,073,554 35,711,379
------------ ------------
Shareholders' equity:
Common stock 106,593 106,593
Additional paid-in capital 41,687,697 41,684,697
Accumulated deficit (31,748,095) (32,400,040)
------------ ------------
Total shareholders' equity 10,046,195 9,391,250
------------ ------------
$ 50,119,749 $ 45,102,629
============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
2
<PAGE> 3
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
May 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales $ 33,205,918 $ 28,151,734
Cost of sales 26,010,335 22,334,003
------------ ------------
Gross profit 7,195,583 5,817,731
Selling, general and administrative expenses (6,071,758) (4,990,257)
Other operating income (expense) (8,006) 40,977
------------ ------------
Operating income 1,115,819 868,451
Interest expense (491,941) (502,204)
Other non-operating income 87,397 48,971
------------ ------------
Income before income taxes 711,275 415,218
Provision for income taxes 59,330 30,700
------------ ------------
Net income $ 651,945 $ 384,518
============ ============
Weighted average shares outstanding:
Basic 10,659,303 10,634,067
Diluted 11,270,000 11,497,101
Earnings per common share:
Basic $ .06 $ .04
Diluted .06 .03
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
3
<PAGE> 4
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
May 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 651,945 $ 384,518
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 290,580 286,078
Other (5,543) 40,000
Changes in operating assets and liabilities:
Accounts receivable (2,949,423) (3,712,983)
Inventory (2,048,536) (625,969)
Prepaid expense and other assets 65,294 (49,901)
Accounts payable 3,693,209 3,973,435
Accrued expenses and other liabilities 41,523 430,093
----------- -----------
Net cash provided by (used in) operating activities (260,951) 725,271
----------- -----------
Investing activities:
Acquisition of property and equipment (349,303) (249,399)
Proceeds from disposition of assets 2,500 --
----------- -----------
Net cash used in investing activities (346,803) (249,399)
----------- -----------
Financing activities:
Net borrowings (repayments) on revolving
credit facility 882,211 (63,632)
Payment of other long-term debt (272,998) (388,688)
----------- -----------
Net cash provided by (used in) financing activities 609,213 (452,320)
----------- -----------
Net increase in cash 1,459 23,552
Cash at beginning of year 129,581 90,000
----------- -----------
Cash at end of period $ 131,040 $ 113,552
=========== ===========
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Purchase of equipment under capital
leases (net of cash paid) 119,130 --
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
4
<PAGE> 5
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 period ended May 31, 1999 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 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 May 31, 1999, the cost of such inventory held in the
bonded warehouses was $7,533,831.
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 - Recently Issued Accounting Standards
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". SOP 98-1 establishes criteria for determining
which costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. In 1998, AcSEC also issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 establishes
standards for the reporting and disclosure of start-up costs, including
organization costs. The Company adopted SOP 98-1 and SOP 98-5 on March 1, 1999.
The adoption of these statements had no effect on the Company's consolidated
financial position or results of operations.
5
<PAGE> 6
5 - Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended May 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Numerator:
Net income $ 651,945 $ 384,518
Numerator for basic and diluted earnings
per share - income available to common
stockholders $ 651,945 $ 384,518
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 10,659,303 10,634,067
Effect of dilutive securities:
Employee stock options 30,327 65,129
Warrants 580,370 797,905
----------- -----------
Dilutive potential common shares 610,697 863,034
----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 11,270,000 11,497,101
=========== ===========
Basic earnings per share $ .06 $ .04
Dilutive earnings per share $ .06 $ .03
=========== ===========
</TABLE>
6
<PAGE> 7
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 Three-Month Periods Ended May 31,
1999 and May 31, 1998
Net income increased to $651,945 in the quarter ended May 31, 1999
(fiscal 2000) from $384,518 in the quarter ended May 31, 1998 (fiscal 1999), an
increase of 70%. The improvement in results of operations in fiscal 2000 was
generally attributable to a significant increase in same store sales and an
increase in the Company's gross margin percentage.
Consolidated sales increased 18% in the quarter ended May 31, 1999,
compared to the same quarter of the previous fiscal year. Same store sales for
33 branches open for more than one year at the beginning of the quarter
increased 19% in the quarter ended May 31, 1999, compared to an increase of 13%
in same store sales in the quarter ended May 31, 1998. The increase in same
store sales in fiscal 2000 exceeded the increase in consolidated sales over the
previous year because of two stores that were closed after the first quarter of
fiscal 1999. In the first quarter of fiscal 2000, the growth in sales was
particularly strong at the Company's operations in Texas and in the western U.S.
Weather conditions in the first quarter affected comparative sales, as
conditions creating demand for air conditioning products were more prevalent in
March and April 1999, compared to 1998. Such comparatively advantageous weather
conditions dissipated in May, however, compared to May 1998, when dry weather
and unusually warm temperatures in Texas and the southeastern U.S. resulted in
high demand for air conditioning products.
The Company's gross margin percentage on sales was 21.7% for the
quarter ended May 31, 1999, compared to 20.7% 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 by reductions in
commodity steel prices while maintaining its sale prices of finished goods.
Selling, general and administrative ("SG&A") expenses increased 22% in
the quarter ended May 31, 1999 compared to the same quarter 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 17.7% in 1998 to 18.3% in 1999, which
increase was consistent with management's expectations.
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, while
management negotiates with the customer to either resume normal services and
billings or terminate the relationship. The customer remains partially
dependent on the Company for the proper operation of its HVACR systems.
Interest expense declined 2% from 1998 to 1999 as a result of lower
interest rates on the Company's variable rate debt. As a percentage of sales,
interest expense has declined from 1.78% in 1998 to 1.48% 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 operating
7
<PAGE> 8
income, which consists primarily of finance charge collections, increased 78%
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.
Liquidity and Capital Resources
Current assets increased 15% from February 28, 1999 to May 31, 1999,
compared to a 14% increase during the same period in 1998. Gross accounts
receivable represented 48 days of gross sales as of May 31, 1999, compared to
50 days of gross sales at May 31, 1998, reflecting positive results from
collection efforts. The increase in inventory from the end of fiscal 1999 is
customary as the Company plans its stocking levels for expected second quarter
sales, which are greater than any other fiscal quarter. Inventory from the end
of February to the end of May increased by 11% in 1999, compared to 4% in 1998,
as a result of May 1999 sales falling short of expectations.
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 May 31, 1999, the Company
had available credit of $1.4 million and $180,000 under the revolving credit
line and the term loan facility, respectively. At May 31, 1999, $14 million of
the outstanding balance on the revolving credit line bears 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%. The Company was not in compliance with a financial covenant under
its revolving credit facility during the quarter ended May 31, 1999. The Bank
has waived such non-compliance through the end of June 1999 and amended the
relevant covenant for periods thereafter.
Management believes that cash flows from operations and the borrowing
availability under the revolving credit facility will provide sufficient
liquidity to meet its normal operating 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 $31 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.
8
<PAGE> 9
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
regions 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
fiscal quarter.
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. One of the Company's subsidiaries does not utilize the Company's
integrated software and has substantially completed testing modifications to
its programs that will accommodate Year 2000. Such modifications were
accomplished by staff of the Company. 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
interconnectivity with its customers' computer systems, and no customer
represents more than 1% of consolidated sales. Management may initiate
discussions during 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 resolve
their 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 address adequately the Year 2000
issue would not have a material adverse impact on the Company.
Recently Issued Accounting Standards
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". SOP 98-1 establishes criteria for determining
which costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. In 1998, AcSEC also issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 establishes
standards for the reporting and disclosure of start-up costs, including
organization costs. The Company adopted SOP 98-1 and SOP 98-5 on
9
<PAGE> 10
March 1, 1999. The adoption of these statements had no effect on the Company's
consolidated financial position or results of operations.
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 which 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 May
31, 1999 the Company had $16.3 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
<PAGE> 11
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.
July 15, 1999 /s/ Anthony R. Maresca
- ----------------------------- -----------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
11
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
<CASH> 131,040
<SECURITIES> 0
<RECEIVABLES> 17,981,115
<ALLOWANCES> 823,867
<INVENTORY> 20,497,712
<CURRENT-ASSETS> 38,682,226
<PP&E> 7,340,146
<DEPRECIATION> 3,489,703
<TOTAL-ASSETS> 50,119,749
<CURRENT-LIABILITIES> 21,918,991
<BONDS> 0
0
0
<COMMON> 106,593
<OTHER-SE> 9,939,602
<TOTAL-LIABILITY-AND-EQUITY> 50,119,749
<SALES> 33,205,918
<TOTAL-REVENUES> 33,285,309
<CGS> 26,010,335
<TOTAL-COSTS> 26,010,335
<OTHER-EXPENSES> 5,887,066
<LOSS-PROVISION> 184,692
<INTEREST-EXPENSE> 491,941
<INCOME-PRETAX> 711,275
<INCOME-TAX> 59,330
<INCOME-CONTINUING> 651,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 651,945
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
