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, 2002
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 ___
---
Shares of Common Stock outstanding at September 30, 2002 - 10,681,294.
-1-
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
August 31, February 28,
2002 2002
---------- ------------
(Unaudited)
Current assets:
Cash $ 108 $ 129
Accounts receivable, net 20,636 16,858
Inventory 26,393 25,987
Prepaid expenses and other 327 275
Deferred income taxes 806 487
-------- -------
Total current assets 48,270 43,736
-------- -------
Property and equipment, net of accumulated
depreciation 5,031 5,405
Deferred income taxes 454 973
Goodwill, net of accumulated amortization 5,258 5,991
Other assets 591 525
-------- --------
$ 59,604 $ 56,630
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 648 $ 898
Accounts payable 21,289 19,411
Accrued expenses and other liabilities 2,637 2,027
-------- --------
Total current liabilities 24,574 22,336
Long-term debt and capital lease obligations,
less current maturities 23,336 23,728
-------- --------
Total liabilities 47,910 46,064
-------- --------
Shareholders' equity:
Common stock 107 107
Additional paid-in capital 41,691 41,691
Accumulated deficit (30,104) (31,232)
-------- --------
Total shareholders' equity 11,694 10,566
-------- --------
$ 59,604 $ 56,630
======== ========
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
(In thousands, except per share amounts)
(Unaudited)
Six months ended Three months ended
August 31, August 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sales $ 90,679 $ 86,218 $ 47,810 $ 46,509
Cost of sales 70,855 67,696 37,196 36,589
-------- -------- -------- --------
Gross profit 19,824 18,522 10,614 9,920
Selling, general and
administrative expenses (16,954) (15,791) (8,691) (8,163)
-------- -------- -------- --------
Operating income 2,870 2,731 1,923 1,757
Interest expense (916) (1,183) (468) (549)
Other non-operating income 216 231 101 140
-------- -------- -------- --------
Income before income taxes 2,170 1,779 1,556 1,348
Provision for income taxes:
Current 110 139 80 104
Deferred 449 200 324 200
-------- -------- -------- --------
Income before cumulative effect of
accounting change 1,611 1,440 1,152 1,044
Cumulative effect of change in
accounting principle, net of tax (483) -- -- --
-------- -------- -------- --------
Net income $ 1,128 $ 1,440 $ 1,152 $ 1,044
======== ======== ======== ========
Basic and diluted earnings (loss)
per share:
Earnings per share before cumulative
effect of accounting change .15 .13 .11 .10
Cumulative effect of accounting change (.04) -- -- --
-------- -------- -------- --------
Earnings per share $ .11 $ .13 $ .11 $ .10
======== ======== ======== ========
Weighted average shares outstanding:
Basic 10,681 10,681 10,681 10,681
======== ======== ======== ========
Diluted 10,681 10,692 10,681 10,703
======== ======== ======== ========
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
(In thousands)
(Unaudited)
Six months ended
August 31,
------------------
2002 2001
------- -------
Operating activities:
Net income $ 1,128 $ 1,440
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change in accounting principle 483 --
Depreciation and amortization 598 710
Deferred income tax expense 449 200
Other (6) (10)
Changes in operating assets and liabilities:
Accounts receivables (3,773) (5,533)
Inventory (406) (1,469)
Prepaid expenses and other assets (121) 290
Accounts payable 1,878 4,264
Accrued expenses and other liabilities 610 539
------- -------
Net cash provided by operating activities 840 431
------- -------
Investing activities:
Acquisition of property and equipment (206) (480)
Proceeds from disposition of assets 7 10
------- -------
Net cash used in investing activities (199) (470)
------- -------
Financing activities:
Net (payments) borrowings on revolving
credit facility (380) 606
Payments on long-term debt (282) (471)
------- -------
Net cash provided by (used in) financing activities (662) 135
------- -------
Net (decrease) increase in cash (21) 96
Cash at beginning of year 129 171
------- -------
Cash at end of period $ 108 $ 267
======= =======
Supplemental disclosure of cash flow information:
Cash paid for
Interest 901 1,109
Income taxes 29 10
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 accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States. Accordingly, they do not include all of the
information and footnotes required for complete financial statements, and
therefore should be reviewed in conjunction with the financial statements and
related notes thereto contained in the Company's annual report for the year
ended February 28, 2002 filed on Form 10-K with the Securities and Exchange
Commission. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Actual operating results for the three-month and six-month periods
ended August 31, 2002, are not necessarily indicative of the results that may be
expected for the fiscal year ended February 28, 2003.
2 - Summary of Significant Accounting Policies
For a description of these policies, refer to Note 1 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended February 28, 2002.
3 - Contingent Liabilities
The Company has an arrangement with an HVACR equipment manufacturer and a
bonded warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of certain of the Company's operations, with
payment due only when products are sold. The supplier retains legal title and
substantial management control with respect to the consigned inventory. The
Company is responsible for damage to and loss of inventory that may occur at its
premises. The Company has the ability to return consigned inventory, at its sole
discretion, to the supplier for a specified period of time after receipt of the
inventory. Such inventory is accounted for as consigned merchandise and is not
recorded on the Company's balance sheet. As of August 31, 2002, the cost of such
inventory held in the bonded warehouses was $7,203,000.
The terms of the consignment agreement further provide that the Company may
be required to purchase inventory not sold within a specified period of time.
Historically, most consigned inventory is sold before the specified purchase
date, and the supplier has never enforced its right to demand payment, instead
permitting such inventory to remain on consignment. As of August 31, 2002,
inventory of approximately $700,000 remained on consignment although it had been
held in excess of the allowable period of time.
4 - New Accounting Pronouncements
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or
Disposal of Long-Lived Assets." The new standard requires one model of
accounting for long-lived assets to be disposed of and broadens the definition
of discontinued operations to include a component of a segment. The adoption of
SFAS 144 did not have any significant impact on its financial position or
results of operations.
-5-
Effective March 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes new accounting and reporting
requirements for goodwill and other intangible assets. Under SFAS No. 142, all
goodwill amortization ceased effective March 1, 2002. Goodwill amortization for
the three and six-month periods ended August 31, 2002 would have otherwise been
$57,000 and $114,000 respectively. Material amounts of recorded goodwill
attributable to each of our applicable subsidiaries were tested for impairment
by comparing the fair value of each subsidiary with its carrying value. Fair
value was determined using both discounted cash flows and internal rates of
return. These impairment tests must be performed upon adoption of SFAS No. 142
and at least annually thereafter. Significant estimates used in the
methodologies include estimates of future cash flows and both future short-term
and long-term growth rates. On an ongoing basis (absent any impairment
indicators), we expect to perform our impairment tests during the fourth fiscal
quarter of each year.
Based on our initial impairment tests, we recognized a charge of $483,000
($0.04 per share) in the first quarter of fiscal 2003 to reduce the carrying
value of goodwill of Lifetime Filter, Inc. to its implied fair value. This
impairment is a result of adopting a fair value approach, under SFAS No. 142, to
testing impairment of goodwill as compared to the previous method utilized in
which evaluations of goodwill impairment were made by comparing estimated future
discounted cash flows to the carrying amount of the assets. Under SFAS No. 142,
the impairment adjustment recognized upon adoption of the new rules was
reflected as a cumulative effect of change in accounting principle in our income
statement for the first quarter of fiscal 2003. Impairment adjustments
recognized after adoption, if any, generally are required to be recognized as
operating expenses.
The unaudited results of operations presented below for the six-month and
three-month periods ended August 31, 2002, and adjusted results of operations
for the same periods ended August 31, 2001, reflect the operations of the
Company had we adopted the non-amortization provisions of SFAS No. 142 effective
March 1, 2001: (in thousands, except per share amounts)
Six months ended Three months ended
August 31, August 31,
------------------ --------------------
2002 2001 2002 2001
------ ------ ------ ------
Net income $1,128 $1,440 $1,152 $1,044
Add: Cumulative effect of change in
accounting principle, net of tax 483 -- -- --
Add: Goodwill amortization, net of tax -- 76 -- 38
------ ------ ------ ------
Adjusted net income $1,611 $1,516 $1,152 $1,082
====== ====== ====== ======
Basic and diluted earnings per share:
Reported net income .11 .13 .11 .10
Cumulative effect of change in
accounting principle, net of tax .04 - - -
Goodwill amortization, net of tax - .01 - -
------ ------ ------ ------
Adjusted net income $ .15 $ .14 $ .11 $ .10
====== ====== ====== ======
-6-
5 - Income Taxes
The provision for current income taxes consists principally of federal
alternative minimum taxes and state income taxes. The provision for deferred
taxes consists of a reduction of current deferred benefits expected to be
realized as a result of the anticipated utilization of net operating loss
carryforwards in fiscal 2003. The reduction is based on applying an effective
tax rate of 21.3% to current year taxable income. The Company has net operating
loss and tax credit carryforwards which offset substantially all of its federal
taxable income.
6 - Debt
The Company has a credit arrangement with a commercial bank ("Bank") that
includes both a revolving credit facility and a term loan facility for capital
expenditures. The maximum amounts that may be borrowed under such facilities are
$25 million and $1 million, respectively. At August 31, 2002, the Company had
available credit under such facilities of $2.3 million and $0.4 million,
respectively. The credit facilities mature in May 2004, and are automatically
extended for one-year periods unless either party gives notice of termination to
the other.
7 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the six months and three months ended August 31, 2002 and
2001 (in thousands, except earnings per share information):
Six Months Ended Three Months Ended
----------------- ------------------
August 31, August 31,
----------------- -----------------
2002 2001 2002 2001
------- ------- ------- -------
Numerator:
Net income $ 1,128 $ 1,440 $ 1,152 $ 1,044
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 1,128 $ 1,440 $ 1,152 $ 1,044
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,681 10,681 10,681 10,681
Effect of dilutive securities:
Warrants 0 11 0 22
------- ------- ------- -------
Dilutive potential common shares 0 11 0 22
------- ------- ------- -------
Denominator for diluted earnings per
share - adj weighted average shares
and assumed conversions 10,681 10,692 10,681 10,703
======= ======= ======= =======
Basic earnings per share $ .11 $ .13 $ .11 $ .10
======= ======= ======= =======
Dilutive earnings per share $ .11 $ .13 $ .11 $ .10
======= ======= ======= =======
-7-
ACR GROUP, INC. AND SUBSIDIARIES
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
ACR Group, Inc. and its subsidiaries (collectively, the "Company") is an
independent distributor of heating, air conditioning and refrigeration ("HVACR")
equipment and related parts and supplies. The Company is among the ten largest
such distributors in the United States. Substantially all of the Company's sales
are to contractor dealers and institutional end-users. Generally accepted
accounting principles allow the aggregation of an enterprise's segment if they
are similar. Although the Company operates in different geographic areas, we
have reviewed the aggregation criteria and determined that the Company operates
as a single segment based on the high degree of similarity of the Company's
operations.
This report on Form 10-Q includes certain statements that may be deemed to
be "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, 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. Such risks and
uncertainties may include the availability of debt or equity capital to fund the
Company's working capital requirements, unusual weather conditions, the effects
of competitive pricing and general economic factors. Our expectations and
beliefs are expressed in good faith and we believe there is a reasonable basis
for them, but there can be no assurance that our 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX-MONTH AND THREE MONTH PERIODS
ENDED AUGUST 31, 2002 AND AUGUST 31, 2001
Six Months Ended August 31, 2002 compared to August 31, 2001
The Company recognized net income of $1,128,000 for the six-month period
ended August 31, 2002 (fiscal 2003) compared to net income of $1,440,000 for the
six-month period ended August 31, 2001 (fiscal 2002). Comparability between
fiscal 2003 and fiscal 2002 is affected by two accounting developments. The
Company adopted SFAS No. 142 as of March 1, 2002 (see New Accounting
Pronouncements, below) and has recorded deferred income tax charges to reduce
the Company's deferred tax assets. Excluding these items, net income in fiscal
2003 would have been $2,060,000, compared to $1,640,000 in fiscal 2002, an
increase of 26%. The increase in such income was attributable to lower interest
costs and an improvement in the Company's gross margin percentage in the current
year.
Consolidated sales increased 5% during the six-month period ended August
31, 2002 compared to the same period in 2001. Sales growth exceeded 20% in
Tennessee and Florida, with single-digit percentage increases in all other trade
areas
-8-
except for Colorado. Fiscal 2003 sales at the Company's business unit based in
Colorado declined 8% as continued economic weakness curtailed new home starts
and dampened demand for the Company's products. Same-store sales in the first
eight months of calendar 2002 increased 7% over 2001, the same percentage
increase in industry-wide product shipments during the same period based on data
compiled by a leading industry trade association.
The Company's gross margin percentage on sales was 21.9% for the six-months
ended August 31, 2002, compared to 21.5% for the same period in 2001. The
increase in gross margin percentage was attributable to the Company's continuing
efforts to reduce the net purchase cost of inventory through national buying
arrangements and consolidation of decentralized purchasing to designated
suppliers, and to refinements in customer pricing models. Gross margin
improvement was particularly evident at certain branch operations opened in the
past two years. These margin improvement initiatives were partially offset by
reduced demand for sheet metal products manufactured by the Colorado business
unit for use in new home construction. The lower demand resulted in a lower
absorption rate of fixed manufacturing costs and, accordingly, a lower gross
margin percentage. The aggregate gross margin percentage of all of the Company's
other operations increased to 21.3% in the six-month period ended August 31,
2002, compared to 20.1% in the preceding year.
Selling, general and administrative ("SG&A") expenses increased 7% in the
six-month period ended August 31, 2002 compared to the same period in 2001,
principally from increased payroll, insurance costs and rent expense. Expressed
as a percentage of sales, SG&A expenses increased in the six-month period from
18.3% in 2001 to 18.7% in 2002.
Interest expense decreased 23% from 2001 to 2002 as a result of lower
average interest rates on the Company's variable rate debt. As a percentage of
sales, interest expense decreased to 1.0% in 2002 from 1.4% in 2001. Average
outstanding debt decreased 5% from 2001 to 2002.
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 current deferred benefits expected to be
realized as a result of the anticipated utilization of net operating loss
carryforwards in fiscal 2003. Substantially all of the Company's net operating
loss carryforward will either expire, or is expected to be utilized, by the end
of fiscal 2004. The Company has estimated a tax rate of 21% to systematically
amortize through fiscal 2004 the deferred tax asset related to its net operating
loss carryforward. This estimated tax rate is likely to change periodically as
the Company re-evaluates its estimate of taxable income through fiscal 2004.
The cumulative effect of the accounting change reflects the result of
adopting the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets"
as of March 1, 2002. For further explanation, see New Accounting Pronouncements,
below.
Three Months Ended August 31, 2002 compared to August 31, 2001
Net income increased to $1,152,000 in the quarter ended August 31, 2002
from $1,044,000 in the quarter ended August 31, 2001, an increase of 10%. The
Company recorded deferred tax charges in such periods of $449,000 and $200,000,
respectively, to recognize the utilization of the Company's net operating loss
carryforward, as more fully described above. Excluding the effect of such
non-cash deferred tax charges, income for the second fiscal quarter increased
19% from 2001 to 2002. As explained in the comparison of six-month results
above, the increase in income before taxes for the second quarter was
attributable to lower interest costs and an improvement in the gross margin
percentage on
-9-
sales.
Both consolidated and same-store sales increased 3% during the quarter
ended August 31, 2002 compared to the same quarter in 2001. The trends described
above in the six-month comparison also apply for the second fiscal quarter,
except that sales in Texas declined 5% compared to 2001. In addition, sales
slowed toward the end of the second quarter, as sales in August 2002 actually
declined compared to 2001. The slowdown in sales in Texas appears to be related
to the economy, as evidenced by a decline in sales to customers involved in
residential new construction. The record heat experienced in certain parts of
the country during summer 2002 did not occur in the Company's principal market
areas. Therefore, while sales peaked as usual in the second fiscal quarter
because of demand created by normal summer temperatures, sales were not enhanced
by extraordinary weather conditions.
The Company's gross margin percentage on sales was 22.2% for the quarter
ended August 31, 2002, compared to 21.3% for the same period in 2001. The
increase in the gross margin percentage was attributable to the same factors as
mentioned earlier in the six-month analysis.
Selling, general and administrative ("SG&A") expenses increased 6% in the
quarter ended August 31, 2002 compared to the same period in 2001. This increase
is consistent with the increase for the six-month period analyzed above.
Expressed as a percentage of sales, SG&A expenses increased in the quarter from
17.6% in 2001 to 18.2% in 2002.
Interest expense in the second quarter decreased 15% from 2001 to 2002 as a
result of both lower average interest rates on the Company's variable rate debt
and a 5% decrease in average outstanding indebtedness. As a percentage of sales,
interest expense decreased to 1.0% in 2002 from 1.2% in 2001.
LIQUIDITY AND CAPITAL RESOURCES
In the six-month period ended August 31, 2002, the Company generated cash
flow from operations of $840,000, compared to $431,000 in 2001. Gross accounts
receivable represented 42 days of gross sales as of August 31, 2002, compared to
44 days at August 31, 2001, reflecting a continuous focus on credit management
and active collection efforts in the uncertain economic environment. Inventory
at August 31, 2002 was 4% greater than at August 31, 2001, the majority of which
consisted of an additional line of HVAC equipment in Texas, reflecting
management's aggressive monitoring of inventory levels.
The Company has credit facilities with a commercial bank ("Bank") which
include an $25 million revolving line of credit and a $1 million term loan
facility for capital expenditures. Outstanding borrowings on the revolving
credit line change daily depending on cash collections and disbursements. During
the six-month period ended August 31, 2002, the Company did not borrow
additional funds from its capital expenditure facility. At August 31, 2002, the
Company had available credit of $2.3 and $0.4 million under the revolving credit
facility and the term loan facility, respectively. As of August 31, 2002,
borrowings under both credit facilities bear interest at the prime rate or LIBOR
plus 2.75%, and the Company had elected the LIBOR option on substantially all
outstanding borrowings. Management believes that availability under the
revolving credit facility will be adequate to finance the Company's working
capital requirements of its existing operations for the foreseeable future.
The Company has approximately $4.7 million in tax loss carryforwards, of
which $3.4 expires in fiscal 2003. Such operating loss carryforwards will
substantially limit the Company's federal income tax liabilities in fiscal
-10-
2003.
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.
NEW ACCOUNTING PRONOUNCEMENTS
Effective March 1, 2002, the Company adopted Statement of Financial
Standards No. 142, (SFAS 142) "Goodwill and Other Intangible Assets," which
establishes new accounting and reporting requirements for goodwill and other
intangible assets. Under SFAS No. 142, all goodwill amortization ceased
effective March 1, 2002. Goodwill amortization for the quarter and six-month
periods ended August 31, 2002 would have otherwise been $57,000 and $114,000,
respectively. Material amounts of recorded goodwill attributable to each of our
reporting units were tested for impairment by comparing the fair value of each
reporting unit with its carrying value. Fair value was determined using
discounted cash flows, internal rates of return and market multiples. These
impairment tests are required to be performed at adoption of SFAS No. 142 and at
least annually thereafter. Significant estimates used in the methodologies
include estimates of future cash flows and both future short-term and long-term
growth rates. On an ongoing basis (absent any impairment indicators), we expect
to perform our impairment tests during our first fiscal quarter.
Utilizing the new criteria, the Company determined that it was appropriate
to write off the entire unamortized amount of goodwill associated with its
filter manufacturing operation that was acquired in 1997. We reached that
conclusion upon consideration of the reporting unit's unprofitability for the
last two fiscal years and a substantial shift in both its product sales mix and
its customer base since the date of acquisition. Net of taxes, the writeoff
amounted to $483,000, or $0.04 per share, and in accordance with the new
standard, is reported in the income statement for the quarter ended August 31,
2002 as a cumulative effect of a change in accounting principle.
Effective March 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The new standard requires one
model of accounting for long-lived assets to be disposed of, and broadens the
definition of discontinued operations to include a component of a segment. The
adoption of SFAS 144 did not have any significant impact on its financial
position or results of operations.
-11-
CRITICAL ACCOUNTING POLICIES
The accounting policies discussed below are critical to the Company's business
operations and an understanding of the Company's financial statements. The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make assumptions and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses in each reporting
period. Management bases its estimates on historical experience and other
factors that are believed to be reasonable under the circumstances. Actual
results, once known, may vary from management's estimates.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Statement of Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". Substantially
all of the Company's revenues consist of sales of HVACR products that are
purchased by the Company from suppliers; less than 5% of the Company's sales are
of products that it manufactures. SAB 101 requires that four basic criteria must
be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the amounts recognized are fixed and determinable, and (4) collectibility is
reasonably assured. The Company records revenue after it receives an order from
a customer with a fixed determinable price and the order is either shipped or
delivered to the customer.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts for estimated losses
resulting from the inability to collect accounts receivable from customers. The
Company establishes the allowance based on historical experience, credit risk of
specific customers and transactions, and other factors. Management believes that
the lack of customer concentration is a significant factor that mitigates the
Company's accounts receivable credit risk. One customer represents approximately
2% of consolidated sales, and no other customer comprises as much as 1% of
sales. The number of customers and their distribution across the geographic
areas served by the Company help to reduce the Company's credit exposure to a
single customer or to economic events that affect a particular geographic
region. Although the Company believes that its allowance for doubtful accounts
is adequate, any future condition that would impair the ability of a broad
section of the Company's customer base to make payments on a timely basis may
require the Company to record additional allowances.
Inventory
Inventories consist of HVACR equipment, parts and supplies and are valued at the
lower of cost or market value using the average cost method. Substantially all
inventories represent finished goods held for sale. Raw materials represent less
than 2% of inventories. When necessary, the carrying value of obsolete or excess
inventory is reduced to estimated net realizable value. The process for
evaluating the value of obsolete or excess inventory requires estimates by
management concerning future sales levels and the quantities and prices at which
such inventory can be sold in the ordinary course of business.
-12-
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, 2002 the Company had $22.7 million outstanding under its credit
facilities with the bank, of which $12.7 million is subject to variable interest
rates. Based on this balance, an immediate change of one percent in the interest
rate would cause a change in interest expense of approximately $127,000, or $.01
per share, on an annual basis.
Item 4. - Statement Regarding Disclosure Controls and Procedures
As of August 31, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective as of August 31, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to August 31, 2002.
PART II - OTHER INFORMATION
Item 4. - Results of Votes of Security Holders
At the Annual Meeting of Shareholders on August 22, 2002, 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 9,732,835 47,600
Alan D. Feinsilver 9,769,155 11,280
Roland H. St. Cyr 9,768,355 12,080
A. Stephen Trevino 9,708,835 71,600
Alex Trevino, Jr. 9,730,835 49,600
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K. None
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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, 2002 /s/ Anthony R. Maresca
------------------------- ------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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CERTIFICATIONS
I, Alex Trevino, Jr., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of ACR Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
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evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
October 15, 2002 /s/ Alex Trevino, Jr.
--------------------- -----------------------------------
Date Alex Trevino, Jr.
President and
Chief Executive Officer
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I, Anthony R. Maresca, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of ACR Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
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evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
October 15, 2002 /s/ Anthony R. Maresca
---------------------- -----------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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