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, 2001
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
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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, 2001 - 10,681,294.
-1-
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, February 28,
2001 2001
------------ ------------
(Unaudited)
Current assets:
Cash $ 267,446 $ 171,249
Accounts receivable, net 21,537,122 15,975,668
Inventory 25,302,661 23,833,400
Prepaid expenses and other 275,425 642,912
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 47,869,654 41,110,229
------------ ------------
Property and equipment, net of accumulated
depreciation 5,676,189 5,768,093
Deferred income taxes 773,000 973,000
Goodwill, net of accumulated amortization 6,108,500 6,222,895
Other assets 466,831 507,350
------------ ------------
$ 60,894,174 $ 54,581,567
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 936,567 $ 956,201
Note payable - revolving line of credit 22,198,428 -
Accounts payable 21,345,850 17,146,529
Accrued expenses and other liabilities 2,376,336 1,837,638
------------ ------------
Total current liabilities 46,857,181 19,940,368
Long-term debt and capital lease obligations,
less current maturities 2,449,856 24,494,007
------------ ------------
Total liabilities 49,307,037 44,434,375
------------ ------------
Shareholders' equity:
Common stock 106,813 106,813
Additional paid-in capital 41,691,379 41,691,379
Accumulated deficit (30,211,055) (31,651,000)
------------ ------------
Total shareholders' equity 11,587,137 10,147,192
------------ ------------
$ 60,894,174 $ 54,581,567
============ ============
The accompanying notes are an integral part
of these condensed financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended Three months ended
August 31, August 31,
--------------------------- ----------------------------
2001 2000 2001 2000
----------- ------------ ------------ -----------
Sales $86,218,393 $ 73,387,722 $ 46,509,374 $40,209,267
Cost of sales 67,696,585 57,639,142 36,589,058 31,576,038
----------- ------------ ------------ -----------
Gross profit 18,521,808 15,748,580 9,920,316 8,633,229
Selling, general and administrative
expenses (15,789,614) (13,610,563) (8,163,757) (7,157,112)
Other operating income
(expense) (1,049) 43,121 (1) 8,614
----------- ------------ ------------ -----------
Operating income 2,731,145 2,181,138 1,756,558 1,484,731
Interest expense (1,182,563) (1,151,117) (549,076) (607,594)
Other non-operating income 230,497 175,855 140,394 95,054
----------- ------------ ------------ -----------
Income before income taxes 1,779,079 1,205,876 1,347,876 972,191
Provision for income taxes:
Current 139,134 119,280 103,534 85,930
Deferred 200,000 - 200,000 -
----------- ------------ ------------ -----------
Net income $ 1,439,945 $ 1,086,596 $ 1,044,342 $ 886,261
=========== ============ ============ ===========
Weighted average shares
outstanding:
Basic 10,681,294 10,671,103 10,681,294 10,671,571
Diluted 10,692,047 11,290,980 10,702,800 11,255,684
Earnings per common share:
Basic $ .13 $ .10 $ .10 $ .08
Diluted .13 .10 .10 .08
The accompanying notes are an integral part
of these condensed financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
August 31,
-------------------------
2001 2000
----------- -----------
Operating activities:
Net income $ 1,439,945 $ 1,086,596
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 710,463 592,707
Deferred income tax expense 200,000 -
Other (10,255) 4,182
Changes in operating assets and liabilities:
Accounts receivables (5,532,651) (4,480,428)
Inventory (1,469,261) (3,262,612)
Prepaid expenses and other assets 289,865 (498,110)
Accounts payable 4,264,255 6,782,644
Accrued expenses and other liabilities 538,698 465,808
----------- -----------
Net cash provided by operating activities 431,059 690,787
----------- -----------
Investing activities:
Acquisition of property and equipment (480,005) (1,447,413)
Acquisition of business, net of cash acquired - (200,643)
Proceeds from disposition of assets 10,500 7,700
----------- -----------
Net cash used in investing activities (469,505) (1,640,356)
----------- -----------
Financing activities:
Net borrowings on revolving credit facility 713,027 1,950,637
Payments on long-term debt (578,384) (978,650)
----------- -----------
Net cash provided by financing activities 134,643 971,987
----------- -----------
Net increase in cash 96,197 22,418
Cash at beginning of year 171,249 107,035
----------- -----------
Cash at end of period $ 267,446 $ 129,453
=========== ===========
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired - 793,712
Fair value of liabilities assumed - 817,915
Goodwill - 404,203
Notes payable to sellers - 152,000
Purchase of property and equipment under capital
leases and notes (net of cash) - 968,612
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, 2001 is not necessarily
indicative of the results to be expected for the full year.
Substantially all inventories represent finished goods held for sale.
2 - Contingent Liabilities
----------------------
The Company has an arrangement with an HVACR equipment manufacturer and a
field warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of the Company's operations in Georgia,
Colorado and Tennessee, with payment due only when products are sold. Such
inventory is accounted for as consigned merchandise and is not recorded on the
Company's balance sheet. As of August 31, 2001, the cost of such inventory held
in the bonded warehouses was $12,150,358.
The terms of the consignment agreement with the supplier further provide
that the Company upon demand by the supplier must purchase merchandise not sold
within a specified period of time. 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 current provision for income taxes consists principally of federal
alternative minimum taxes and state income taxes. The provision for deferred
taxes consists of a reduction of future deferred benefits expected to be
realized as a result of the anticipated expiration of net operating loss
carryforwards in fiscal 2003. The Company has net operating loss and tax credit
carryforwards which offset substantially all of its federal taxable income.
4 - Debt
----
The Company has a revolving line of credit arrangement with a commercial
bank ("Bank"). The maximum amount that may be borrowed under the revolving line
of credit is $25 million, including up to $1 million for letters of credit. The
maturity date of the credit facility is May 2003, with an automatic extension
for one-year periods unless either party gives notice of termination to the
other. At August 31, 2001, the Company had $22.2 million outstanding under the
facility.
Because of lower than expected net income in the first two quarters of
fiscal 2002, as of August 31, 2001, the Company was not in compliance with two
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 August 31, 2001.
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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. Management has
initiated discussions with the Bank concerning the financial covenants in the
loan agreement and expects to reach an agreement before the end of fiscal 2002
to amend the relevant covenants and waive events of non-compliance. 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
operations, debt service and expected capital expenditures.
5 - Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have definite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003, beginning March
1, 2002. The impact of applying the provisions of the Statement has not yet been
determined. The maximum possible increase to income before income taxes on an
annual basis as a result of the nonamortization provision is approximately
$150,000.
-6-
6 - 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,
------------------------------ ------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Numerator:
Net income $ 1,439,945 $ 1,086,596 $ 1,044,342 $ 886,261
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 1,439,945 $ 1,086,596 $ 1,044,342 $ 886,261
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,681,294 10,671,103 10,681,294 10,671,571
Effect of dilutive securities:
Employee stock options 32,521 36,220
Warrants 10,753 587,356 21,506 547,893
----------- ----------- ----------- -----------
Dilutive potential common shares 10,753 619,877 21,506 584,113
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 10,692,047 11,290,980 10,702,800 11,255,684
=========== =========== =========== ===========
Basic earnings per share $ .13 $ .10 $ .10 $ .08
Dilutive earnings per share $ .13 $ .10 $ .10 $ .08
=========== =========== =========== ===========
-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 Six-Month and Three-Month Periods
-----------------------------------------------------------------------------
Ended August 31, 2001 and August 31, 2000
-----------------------------------------
Six Months Ended August 31, 2001 Compared to 2000
-------------------------------------------------
Net income increased to $1,439,945 in the six-month period ended August 31,
2001 (fiscal 2002) from $1,086,596 in the six-month period ended August 31, 2000
(fiscal 2001), an increase of 33%. Net income in fiscal 2002 includes a non-cash
charge to deferred income taxes of $200,000. Excluding this charge, net income
in fiscal 2002 would have increased 51% over the same period in fiscal 2001. The
improvement in pre-tax income in fiscal 2002 was generally attributable to an
increase in same-store sales and to a decline in operating losses at recently
opened branches. From October 1999 through December 2000, the Company 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 six-month periods ended
August 31, 2001 and 2000, aggregate operating losses for the 12 branches
referred to above were approximately $190,000 and $360,000, respectively.
Consolidated sales increased 17% in the six-month period ended August 31,
2001, compared to the same period in 2000. Sales at the ten branch operations
opened during fiscal 2001 aggregated $8.5 million in the six-month period ended
August 31, 2001, compared to $0.6 million in the six-month period ended August
31, 2000. Same-store sales for the 37 branches open more than one year at the
beginning of the fiscal year (March 1) increased 9% in the six-month period
ended August 31, 2001, compared to a decrease of 2% in same-store sales in the
same period of 2000. Same-store sales growth occurred at over 70% of the
Company's branches, with the highest growth rates occurring in Florida and the
western region of the United States. Sales of new lines of HVACR equipment,
which were first introduced in fiscal 2001, contributed significantly to the
sales increase at these operations.
The Company's gross margin percentage on sales was 21.5% for the six-month
periods ended August 31, 2001 and 2000. Lower than average gross margin
percentages at the Company's new branch operations were offset by continued
reductions in the net purchase cost of inventory through national buying
arrangements. In addition, the gross margin percentage at 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 16% in the
six-month period ended August 31, 2001 compared to the same period of 2000,
because of the costs associated with the new branch operations. Expressed as a
percentage of sales, SG&A expenses decreased from 18.5% in 2000 to 18.3% in
2001, as the Company gained operating leverage from same-store sales growth.
Increases in both workers compensation costs and transportation costs
attributable to fuel prices contributed to the overall increase in SG&A
expenses.
Interest expense increased 3% from 2000 to 2001, compared to a 20% increase
in borrowings from the previous year, as lower interest rates on the Company's
variable rate debt mitigated the cost of additional debt incurred to finance the
new branch openings in fiscal 2001. As a percentage of sales, interest expense
decreased from 1.6% in 2000 to 1.4% in 2001. Other non-
-8-
operating income, which consists primarily of finance charge collections,
increased 31% from 2000 to 2001.
The current provision for income taxes consists principally of federal
alternative minimum taxes and state income taxes. The provision for deferred
taxes consists of a reduction of future deferred benefits expected to be
realized as a result of the anticipated expiration of net operating loss
carryforwards in fiscal 2003. However, as a result of the Company's continued
use of tax loss carryforwards, the Company will have minimal liability for
Federal income taxes through fiscal 2003. See Liquidity and Capital Resources,
below.
Three Months Ended August 31, 2001 Compared to 2000
---------------------------------------------------
Net income increased to $1,044,342 in the quarter ended August 31, 2001
from $886,261 in the quarter ended August 31, 2000, an increase of 18%.
Excluding the provision for deferred income taxes of $200,000 recorded in the
quarter ended August 31, 2001, net income would have increased 40% compared to
the same quarter of 2000. Such increase in results of operations was
attributable to the same factors described above with respect to the six-month
period ended August 31, 2001. In the quarters ended August 31, 2001 and 2000,
aggregate operating losses of the branches opened since October 1999 were
approximately $65,000 and $275,000, respectively.
Sales increased 16% from the second quarter of fiscal 2001 to fiscal 2002,
with same-store sales increasing 8% for branches open for more than one year at
the beginning of the fiscal year. Sales at the ten branch operations opened
during fiscal 2001 aggregated $4.6 million in the quarter ended August 31, 2001,
compared to $0.5 million in the quarter ended August 31, 2000. Sales in Texas
increased at a double-digit rate in the quarter as the Company added outside
sales personnel in the state and temperatures reached customary summer levels
from mid-July through August. In contrast, after several successive quarters of
double-digit sales growth, the Company's operations in California experienced a
small same-store sales decline as a result of both unseasonably cool
temperatures and reaction to the state's energy crisis.
The Company's gross margin percentage on sales was 21.3% for the quarter
ended August 31, 2001, compared to 21.5% in 2000. Such decline is attributable
both to a lower than average gross margin of 20.0% at the new branches and to
market share gains from sales to high-volume customers that typically purchase
products at highly competitive prices.
SG&A expenses as a percentage of sales decreased from 17.8% in 2000 to
17.6% in 2001, because of the operating leverage associated with same-store
sales growth. Interest expense decreased 10% from 2000 to 2001 as a result of
lower average interest rates on the Company's variable rate debt.
Liquidity and Capital Resources
-------------------------------
Current assets increased 16% from February 28, 2001 to August 31, 2001,
compared to a 26% increase during the same period in 2000, principally because
of an increase in accounts receivable that resulted from the seasonal increase
in sales. Gross accounts receivable represented 44 days of gross sales as of
August 31, 2001 compared to 45 days at August 31, 2000, reflecting a continuous
focus on credit management and aggressive collection of delinquent accounts.
Inventory from the end of February to the end of August increased by 5% in 2001,
compared to an increase of 20% in 2000. Approximately 60% of the inventory
increase in 2000 was at branches opened in the first two quarters of the fiscal
year.
The Company has credit facilities with a commercial bank ("Bank") which
-9-
include an $25 million revolving line of credit, including up to $1 million for
letters of credit, and a $1 million term loan facility for capital expenditures.
During the quarter ended August 31, 2001, the Company borrowed $183,591 against
the capital expenditure facility. At August 31, 2001, the Company had available
credit of $1.7 and $0.4 million under the revolving credit line and the capital
expenditure term loan facility, respectively. At August 31, 2001, the
outstanding balance on the revolving credit line and the term loan facility
bears interest at LIBOR plus 2.75% (currently 6.33%).
Because of lower than expected net income in the first two quarters of
fiscal 2002, as of August 31, 2001, the Company was not in compliance with two
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 covenant.
Therefore, according to the strict provisions of the loan agreement, the
Company's revolving line of credit is callable, and, as required by generally
accepted accounting principles, such indebtedness is classified as a current
liability in the balance sheet as of August 31, 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. Management has initiated discussions
with the Bank concerning the financial covenants in the loan agreement and
expects to reach an agreement before the end of fiscal 2002 to amend the
relevant covenants and waive events of non-compliance. 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 operations, debt service and expected
capital expenditures.
The Company has approximately $8 million in tax loss carryforwards of which
approximately $7 million expire by fiscal 2003. Such operating loss
carryforwards will substantially limit the Company's federal income tax
liabilities in the near future.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have definite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003, beginning March
1, 2002. The impact of applying the provisions of the Statement has not yet been
determined. The maximum possible increase to income before income taxes on an
annual basis as a result of the nonamortization provision is approximately
$150,000.
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.
-10-
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.
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, unusual weather conditions, the effects of competitive
pricing and general economic factors.
-11-
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk exposure related to changes in
interest rates on its senior credit facility, which includes revolving credit
and term notes. These instruments carry interest at a pre-agreed upon percentage
point spread from either the prime interest rate or LIBOR. Under its senior
credit facility the Company may, as its option, fix the interest rate for
certain borrowings based on a spread over LIBOR for 30 days to 6 months. At
August 31, 2001 the Company had $22.2 million outstanding under its senior
credit facility. The Company's objective in maintaining these variable rate
borrowings is the flexibility obtained regarding lower overall costs as compared
with fixed-rate borrowings.
-12-
PART II - OTHER INFORMATION
Item 4. - Results of Votes of Security Holders
At the Annual Meeting of Shareholders on August 16, 2001, 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 9,687,980 60,940
Ronald T. Nixon 9,704,390 44,530
Roland H. St. Cyr 9,715,380 33,540
A. Stephen Trevino 9,665,854 83,066
Alex Trevino, Jr. 9,722,675 26,245
Item 6. - Exhibits and Reports on Form 8-K
(a) 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, 2001 /s/ Anthony R. Maresca
-------------------------------- -----------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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