<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 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.
--------------------------------------------------------------------------------
(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
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _____
-----
Shares of Common Stock outstanding at December 31, 2000 - 10,681,294.
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
November 30, February 29,
2000 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 118,522 $ 107,035
Accounts receivable, net 17,263,280 14,358,891
Inventory 22,489,594 18,445,097
Prepaid expenses and other 527,898 386,896
Deferred income taxes 487,000 487,000
----------- -----------
Total current assets 40,886,294 33,784,919
----------- -----------
Property and equipment, net of accumulated
depreciation 5,893,525 3,689,448
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 6,257,071 6,023,207
Other assets 484,479 370,929
----------- -----------
$54,494,369 $44,841,503
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,045,135 $ 1,788,255
Note payable - revolving line of credit 19,318,019 -
Accounts payable 17,838,845 12,182,803
Accrued expenses and other liabilities 2,290,440 1,741,710
------------ ------------
Total current liabilities 40,492,439 15,712,768
Long-term debt and capital lease obligations,
less current maturities 2,058,022 17,498,852
------------ ------------
Total liabilities 42,550,461 33,211,620
------------ ------------
Shareholders' equity:
Common stock 106,813 106,706
Additional paid-in capital 41,691,379 41,696,584
Accumulated deficit (29,854,284) (30,173,407)
------------ ------------
Total shareholders' equity 11,943,908 11,629,883
------------ ------------
$ 54,494,369 $ 44,841,503
============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
November 30, November 30,
--------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $107,037,671 $100,511,288 $ 33,649,949 $29,198,180
Cost of sales 84,118,449 78,378,133 26,479,307 22,538,342
------------ ------------ ------------ -----------
Gross profit 22,919,222 22,133,155 7,170,642 6,659,838
Selling, general and
administrative expenses (21,003,156) (18,031,129) (7,392,593) (5,804,275)
Other operating income (expense) 47,305 (17,401) 4,184 (1,783)
------------ ------------ ------------ -----------
Operating income 1,963,371 4,084,625 (217,767) 853,780
Interest expense (1,810,323) (1,482,460) (659,206) (489,548)
Other non-operating income 303,393 271,931 127,538 85,652
------------ ------------ ------------ -----------
Income (loss) before income taxes 456,441 2,874,096 (749,435) 449,884
Provision for income taxes 137,318 226,500 18,038 68,560
------------ ------------ ------------ -----------
Net income $ 319,123 $ 2,647,596 $ (767,473) $ 381,324
============ ============ ============ ===========
Weighted average shares outstanding:
Basic 10,674,500 10,666,857 10,681,294 10,670,634
Diluted 11,216,436 11,274,243 10,681,294 11,260,561
Earnings per common share:
Basic $.03 $.25 $(.07) $.04
Diluted .03 .23 (.07) .03
</TABLE>
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)
<TABLE>
<CAPTION>
Nine months ended
November 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 319,123 $ 2,647,596
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 936,129 864,042
Other (3,856) 8,682
Changes in operating assets and liabilities:
Accounts receivables (2,522,517) (682,021)
Inventory (3,681,924) (238,467)
Prepaid expenses and other assets (415,093) 84,405
Accounts payable 4,859,904 (1,769,043)
Accrued expenses and other liabilities 533,606 498,838
----------- -----------
Net cash provided by operating activities 25,372 1,414,032
----------- -----------
Investing activities:
Acquisition of property and equipment (1,910,829) (737,578)
Acquisition of business, net of cash acquired (200,643) -
Proceeds from disposition of assets 33,536 17,242
----------- -----------
Net cash used in investing activities (2,077,936) (720,336)
----------- -----------
Financing activities:
Net borrowings on revolving credit facility 3,353,827 602,069
Payments on long-term debt (1,289,776) (1,269,379)
----------- -----------
Net cash provided by (used in) financing activities 2,064,051 (667,310)
----------- -----------
Net increase in cash 11,487 26,386
Cash at beginning of year 107,035 129,581
----------- -----------
Cash at end of period $ 118,522 $ 155,967
=========== ===========
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) 1,033,883 196,966
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. - Basis of Presentation
---------------------
The interim financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normally
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. The results of operations
for the three-month and nine-month periods ended November 30, 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 November 30, 2000, the cost of such inventory
held in the bonded warehouses was $12,332,489.
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 November 30, 2000, the Company had $20.2 million outstanding under
this credit facility.
Because of lower than expected net income in the first three quarters of
fiscal 2001, as of November 30, 2000, the Company was not in compliance with
certain financial covenants 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
covenants. 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 November 30, 2000. Management is
engaged in 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 fourth 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
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credit will provide sufficient liquidity to meet the Company's working capital
requirements for existing branch operations, debt service and expected capital
expenditures.
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<PAGE>
5. - Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Nine Months Ended November 30, Three Months Ended November 30,
---------------------------------------- --------------------------------------
2000 1999 2000 1999
----------------- ------------------- ------------------ --------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 319,123 $ 2,647,596 ($767,473) $ 381,324
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 319,123 $ 2,647,596 ($767,473) $ 381,324
================= =================== ================== ==============
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,674,500 10,666,857 10,681,294 10,670,634
Effect of dilutive securities:
Employee stock options 21,680 22,878 - 18,395
Warrants 520,256 584,508 - 571,532
----------------- ------------------- ------------------ --------------
Dilutive potential common shares 541,936 607,386 - 589,927
----------------- ------------------- ------------------ --------------
Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 11,216,436 11,274,243 10,681,294 11,260,561
================= =================== =================== ===============
Basic earnings per share $ .03 $ .25 $ (.07) $ .04
Dilutive earnings per share $ .03 $ .23 $ (.07) $ .03
----------------- ------------------- ------------------ --------------
</TABLE>
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Results of Operations for the Nine-Month and Three-Month Periods
------------------------------------------------------------------------------
Ended November 30, 2000 and November 30, 1999
---------------------------------------------
Nine Months Ended November 30, 2000 Compared to 1999
----------------------------------------------------
Net income decreased to $319,123 in the nine-month period ended November
30, 2000 (fiscal 2001) from $2,647,596 in the nine-month period ended November
30, 1999 (fiscal 2000), a decline of 88%. The change in results of operations
in fiscal 2001 was attributable principally to both a decline in same store
sales and gross profit and the costs associated with opening new branch
operations. Since the end of the second quarter of fiscal 2000, the company has
opened 12 branch operations. 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 nine-month
period ended November 30, 2000, aggregate operating losses for the 12 branches
referred to above were approximately $930,000.
Consolidated sales increased 6% in the nine-month period ended November 30,
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 1% in
the nine-month period ended November 30, 2000, compared to an increase of 7% in
same store sales in the same period of 1999. The decrease 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 4% decline in same store sales
in 2000.
The Company's gross margin percentage on sales was 21.4% for the nine-month
period ended November 30, 2000, compared to 22.0% in 1999, while the same store
gross margin percentage decreased from 22.0% 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 16% in the
nine-month period ended November 30, 2000 compared to the same period of 1999.
Expressed as a percentage of sales, SG&A expenses increased from 17.9% in 1999
to 19.6% 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 nine-month
period ended November 30, 2000 were 18.9% 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 22% 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 1.5% in 1999 to 1.7% 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 and the rental of a
portion of the building owned in Gainesville, Florida, increased significantly
from 1999 to 2000.
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<PAGE>
The current provision for income taxes consists principally of federal
alternative minimum taxes and state income taxes. As a result of the Company's
substantial tax loss carryforwards, the Company has minimal liability for
Federal income taxes. See Liquidity and Capital Resources, below.
Three Months Ended November 30, 2000 Compared to 1999
-----------------------------------------------------
The Company incurred a net loss of $767,473 in the quarter ended November
30, 2000 compared to net income of $381,324 in the quarter ended November 30,
1999, a decline of 301%. Such decrease in results of operations was
attributable to the same factors as described above with respect to the nine-
month period ended November 30, 2000. In the quarter ended November 30, 2000,
aggregate operating losses of the new branches were approximately $590,000.
Sales increased 15% from the third quarter of fiscal 2000 to fiscal 2001,
with same store sales increasing 4% for branches open for more than one year at
the beginning of the quarter. The quarterly sales increase was most pronounced
in the Nevada, Florida and California market areas, with the company's
operations in Florida and California each attaining double-digit increases in
same store sales.
The Company's gross margin percentage on sales was 21.3% for the quarter
ended November 30, 2000, down from 22.8% in 1999, with the effect of branches
opened or acquired after the end of the second quarter of fiscal 2000 at 17.0%
for the same period. To date, management has generally declined to reduce
margins in 2000 in order to gain incremental sales unless the efforts are
directed at new branch operations.
SG&A expenses as a percentage of sales increased from 19.9% in 1999 to
22.0% in 2000, generally because of the shortfall in planned sales during the
quarter ended November 30, 2000. Excluding the effect of branches opened or
acquired after the end of the second quarter of fiscal 2000, SG&A expenses for
the three-month period ended November 30, 2000 were 20.4% of sales. Interest
expense increased 35% 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 21% from February 29, 2000 to November 30, 2000,
compared to a 12% increase during the same period in 1999, principally because
of the inventory stocked at the new branches. Gross accounts receivable
represented 50 days of gross sales as of November 30, 2000 and 52 days at
November 30, 1999, reflecting a continuous focus on credit management and
aggressive collection of delinquent accounts. Inventory from the end of February
to the end of November increased by 22% in 2000, compared to an increase of 1%
in 1999. The inventory increase through November 30, 2000 over the
corresponding period in the prior year is located at the branches opened or
acquired since the second quarter of fiscal 2000.
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 November 30, 2000, the
Company had available credit of $2.0 million under the revolver. At November
30, 2000, no funds were borrowed under either of the new term loan facilities or
the acquisition line of credit. At November 30, 2000, the outstanding balance
on both the revolving credit line and the term loan facilities bear interest at
the prime rate plus 1/4% (presently 9.75%), adjusted monthly.
Because of lower than expected net income in the first three quarters of
fiscal 2001, as of November 30, 2000, the company was not in compliance with
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certain financial covenants 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
covenants. 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 November 30, 2000. Management has
engaged in discussions with the Bank concerning the financial covenants in the
loan agreement and expects such discussions toward a resolution of the situation
to be finalized during the fourth 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.
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.
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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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<PAGE>
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. In the
third quarter of fiscal 2001, the Company entered into agreements to cap the
LIBOR rate applicable to $8 million of its revolving credit facility for a
period of up to three years. In addition, Company may, at its option, fix the
interest rate for certain borrowings other than the revolving credit facility
based on a spread over LIBOR for 30 days to 6 months. At November 30, 2000 the
Company had $20.2 million outstanding under its senior credit facility. The
Company's objective in maintaining substantial variable rate borrowings is the
flexibility obtained regarding lower overall costs as compared with fixed-rate
borrowings.
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<PAGE>
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.
January 16, 2001 /s/ Anthony R. Maresca
-------------------------------- -------------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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