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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, 2000
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 77042-6039
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(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 June 30, 2000 - 10,670,634.
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, February 29,
2000 2000
----------- -----------
(Unaudited)
Current assets:
Cash $ 252,796 $ 107,035
Accounts receivable, net 17,389,413 14,358,891
Inventory 19,745,756 18,445,097
Prepaid expenses and other 478,833 386,896
Deferred income taxes 487,000 487,000
----------- -----------
Total current assets 38,353,798 33,784,919
----------- -----------
Property and equipment, net of accumulated
depreciation 4,168,159 3,689,448
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 6,371,540 6,023,207
Other assets 433,568 370,929
----------- -----------
$50,300,065 $44,841,503
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,489,120 $ 1,788,255
Accounts payable 15,393,286 12,182,803
Accrued expenses and other liabilities 1,785,458 1,741,710
----------- -----------
Total current liabilities 18,667,864 15,712,768
Long-term debt and capital lease obligations,
less current maturities 19,798,983 17,498,852
----------- -----------
Total liabilities 38,466,847 33,211,620
----------- -----------
Shareholders' equity:
Common stock 106,706 106,706
Additional paid-in capital 41,699,584 41,696,584
Accumulated deficit (29,973,072) (30,173,407)
----------- -----------
Total shareholders' equity 11,833,218 11,629,883
----------- -----------
$50,300,065 $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)
Three months ended
May 31,
-------------------------
2000 1999
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Sales $33,178,455 $33,205,918
Cost of sales 26,063,104 26,010,335
----------- -----------
Gross profit 7,115,351 7,195,583
Selling, general and administrative expenses (6,453,451) (6,071,758)
Other operating income (expense) 34,507 (8,006)
----------- -----------
Operating income 696,407 1,115,819
Interest expense (543,523) (491,941)
Other non-operating income 80,801 87,397
----------- -----------
Income before income taxes 233,685 711,275
Provision for income taxes 33,350 59,330
----------- -----------
Net income $ 200,335 $ 651,945
=========== ===========
Weighted average shares outstanding:
Basic 10,670,634 10,659,303
Diluted 11,326,275 11,270,000
Earnings per common share:
Basic $ .02 $ .06
Diluted .02 .06
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)
Three months ended
May 31,
-------------------------
2000 1999
----------- -----------
Operating activities:
Net income $ 200,335 $ 651,945
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 286,624 290,580
Other 5,721 (5,543)
Changes in operating assets and liabilities:
Accounts receivables (2,639,852) (2,949,423)
Inventory (938,086) (2,048,536)
Prepaid expenses and other assets (223,656) 65,294
Accounts payable 2,414,345 3,693,209
Accrued expenses and other liabilities 28,624 41,523
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Net cash used in operating activities (865,945) (260,951)
----------- -----------
Investing activities:
Acquisition of property and equipment (689,195) (349,303)
Acquisition of business, net of cash acquired (200,643) -
Proceeds from disposition of assets 1,200 2,500
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Net cash used in investing activities (888,638) (346,803)
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Financing activities:
Net borrowings on revolving credit facility 2,193,021 882,211
Payments on long-term debt (292,677) (272,998)
----------- -----------
Net cash provided by financing activities 1,900,344 609,213
----------- -----------
Net increase in cash 145,761 1,459
Cash at beginning of year 107,035 129,581
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Cash at end of period $ 252,796 $ 131,040
=========== ===========
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 (net of cash) 63,550 119,130
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 period ended May 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 May 31, 2000, the cost of such inventory held in
the bonded warehouses was $13,178,294.
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. At
May 31, 2000, the Company had $18.5 million outstanding under this credit
facility and a maturity date set for May 2003, with an automatic extension for
one-year periods unless either party gives notice of termination to the other.
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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,
---------------------------------
2000 1999
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<S> <C> <C>
Numerator:
Net income $ 200,335 $ 651,945
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 200,335 $ 651,945
============ ============
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,670,634 10,659,303
Effect of dilutive securities:
Employee stock options 28,822 30,327
Warrants 626,819 580,370
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Dilutive potential common shares 655,641 610,697
------------ ------------
Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 11,326,275 11,270,000
============ ============
Basic earnings per share $ .02 $ .06
============ ============
Dilutive earnings per share $ .02 $ .06
============ ============
</TABLE>
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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 Three-Month Periods Ended May 31,
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2000 and May 31, 1999
---------------------
Net income decreased to $200,335 in the quarter ended May 31, 2000 (fiscal
2001) from $651,945 in the quarter ended May 31, 1999 (fiscal 2000), a decrease
of 69%. The decline in results of operations in fiscal 2001 was generally
attributable to a decline in same store sales, which was particularly
significant during the month of April, and to the expenses associated with a
branch operation in Nashville, TN that was opened in December 1999, and a branch
operation in El Paso, TX that was acquired in April 2000.
Consolidated sales were unchanged in the quarter ended May 31, 2000
compared to the quarter ended May 31, 1999. Same store sales for the 36 branches
open for more than one year at the beginning of the quarter decreased 4% in the
quarter ended May 31, 2000, compared to an increase of 19% in the quarter ended
May 31, 1999. Those operations of the Company located in Colorado, New Mexico
and Nevada, which have a greater concentration of sales to the new construction
segment of the market than the Company's operations in other geographic areas,
experienced a 14% decline in same store sales in the first quarter. Sales in the
far western U.S. experienced strong gains as unseasonably warm weather created a
strong demand for air conditioning products.
The Company's gross margin percentage on sales was 21.4% for the quarter
ended May 31, 2000, compared to 21.7% in 1999. Such decline arose principally
because of efforts at the Company's operations in Florida to sell the remaining
inventory of a discontinued equipment product line. This activity was
substantially completed in the first quarter, and the Company expects the gross
margin percentage at the Florida operations to return to customary levels in the
second quarter of fiscal 2001.
Selling, general and administrative ("SG&A") expenses increased 6% in the
quarter ended May 31, 2000 compared to the same quarter of 1999. Expressed as a
percentage of sales, SG&A expenses increased from 18.3% in 1999 to 19.5% in
2000. The costs associated with the branches opened or acquired after the end of
the quarter ended May 31, 1999, together with increases in payroll and fuel
costs and the unchanged consolidated sales volume, accounted for such percentage
increases.
Interest expense increased 10% 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 1.48% in 1999 to 1.64%
in 2000. The additional borrowings were used principally to reduce trade
liabilities in order to obtain additional payment discounts. In the quarter
ended May 31, 2000, such payment discounts increased 49% over the same quarter
in 1999.
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.
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Liquidity and Capital Resources
-------------------------------
Working capital increased 9% from February 29, 2000 to May 31, 2000,
compared to 7% increase in the same period in 1999. Gross accounts receivable
represented 46 days of gross sales as of May 31, 2000, compared to 48 days of
gross sales in receivables at May 31, 1999, reflecting an increase in May 2000
sales over the preceding year and positive collection efforts. An increase in
inventory during the first fiscal quarter is customary as the Company plans its
stocking levels for expected second quarter sales, which are greater than any
other fiscal quarter. However, management has emphasized efforts to control
inventory levels, and the increase in inventory from the end of February to the
end of May was only 7% in 2000, compared to 11% in 1999.
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, 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 May 31, 2000, the
Company had available credit of $2.4 million under the revolver. At May 31,
2000, no funds were borrowed under either of the new term loan facilities or the
acquisition line of credit. At May 31, 2000, the outstanding balance on both the
revolving credit line and the term loan facilities bear interest at the prime
rate (presently 9.50%), adjusted monthly.
The Company has undertaken a branch expansion plan and expects to open as
many as eight new branch operations during the second and third quarters of
fiscal 2001. Based on its prior experience, management believes that such
branches will require approximately $3 to $3.5 million in capital for leasehold
improvements, warehouse equipment, accounts receivable and inventory. In
addition, management expects to utilize approximately $3.4 million of the real
estate term loan facility during the second quarter of fiscal 2001 in order to
construct additional warehouse space for its filter manufacturing business and
to acquire certain facilities occupied by branch operations in Colorado and New
Mexico. Management believes that its revolving credit facility will be adequate
to finance the Company's working capital requirements of its existing and
planned new operations for the foreseeable future.
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.
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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.
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.
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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, 2000 the Company had $18.5 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.
PART II - OTHER INFORMATION
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.
July 14, 2000 /s/ Anthony R. Maresca
----------------------------- ---------------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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