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, 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
--------------------------------------------------------------------------------
(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, 2001 - 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
November 30, February 28,
2001 2001
------------ -----------
(Unaudited)
Current assets:
Cash $ 232,460 $ 171,249
Accounts receivable, net 18,501,649 15,975,668
Inventory 25,178,157 23,833,400
Prepaid expenses and other 297,171 642,912
Deferred income taxes 487,000 487,000
----------- -----------
Total current assets 44,696,437 41,110,229
----------- -----------
Property and equipment, net of accumulated
depreciation 5,567,965 5,768,093
Deferred income taxes 773,000 973,000
Goodwill, net of accumulated amortization 6,049,565 6,222,895
Other assets 510,240 507,350
----------- -----------
$57,597,207 $54,581,567
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 895,685 $ 956,201
Note payable - revolving line of credit 19,864,108 -
Accounts payable 20,800,774 17,146,529
Accrued expenses and other liabilities 2,542,448 1,837,638
------------ ------------
Total current liabilities 44,103,015 19,940,368
Long-term debt and capital lease obligations,
less current maturities 2,243,375 24,494,007
------------ ------------
Total liabilities 46,346,390 44,434,375
------------ ------------
Shareholders' equity:
Common stock 106,813 106,813
Additional paid-in capital 41,691,379 41,691,379
Accumulated deficit (30,547,375) (31,651,000)
------------ ------------
Total shareholders' equity 11,250,817 10,147,192
------------ ------------
$ 57,597,207 $ 54,581,567
============ ============
The accompanying notes are an integral part
of these condensed financial statements.
-2-
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended Three months ended
November 30, November 30,
--------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------- ------------ -------------
Sales $123,225,812 $107,037,671 $ 37,007,419 $ 33,649,949
Cost of sales 96,722,828 84,118,449 29,026,243 26,479,307
------------ ------------ ------------ ------------
Gross profit 26,502,984 22,919,222 7,981,176 7,170,642
Selling, general and
administrative expenses (23,764,347) (21,003,156) (7,974,733) (7,392,593)
Other operating income (expense) (983) 47,305 66 4,184
------------ ------------ ------------ ------------
Operating income 2,737,654 1,963,371 6,509 (217,767)
Interest expense (1,646,264) (1,810,323) (463,701) (659,206)
Other non-operating income 359,172 303,393 128,675 127,538
------------ ------------ ------------- ------------
Income before income taxes 1,450,562 456,441 (328,517) (749,435)
Provision for income taxes:
Current 146,937 137,318 7,803 18,038
Deferred 200,000 - - -
------------ ------------ ------------- ------------
Net income $ 1,103,625 $ 319,123 $ (336,320) $ (767,473)
============ ============ ============= ============
Weighted average shares outstanding:
Basic 10,681,294 10,674,500 10,681,294 10,681,294
Diluted 10,692,047 11,216,436 10,681,294 10,681,294
Earnings per common share:
Basic $ .10 $ .03 $ (.03) $ (.07)
Diluted .10 .03 (.03) (.07)
The accompanying notes are an integral part
of these condensed financial statements.
-3-
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
November 30,
------------------------------
2001 2000
------------ -----------
Operating activities:
Net income $ 1,103,625 $ 319,123
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,067,714 936,129
Deferred income tax expense 200,000 -
Other (20,000) (3,856)
Changes in operating assets and liabilities:
Accounts receivables (2,533,620) (2,522,517)
Inventory (1,344,757) (3,681,924)
Prepaid expenses and other assets 204,825 (415,093)
Accounts payable 3,719,568 4,859,904
Accrued expenses and other liabilities 704,612 533,606
----------- -----------
Net cash provided by operating activities 3,101,967 25,372
----------- -----------
Investing activities:
Acquisition of property and equipment (628,011) (1,910,829)
Acquisition of business, net of cash acquired - (200,643)
Proceeds from disposition of assets 53,628 33,536
----------- -----------
Net cash used in investing activities (574,383) (2,077,936)
----------- -----------
Financing activities:
Net borrowings on revolving credit facility 571,777 3,353,827
Payments on long-term debt (3,038,150) (1,289,776)
----------- -----------
Net cash (used in) provided by financing activities (2,466,373) 2,064,051
----------- -----------
Net increase in cash 61,211 11,487
Cash at beginning of year 171,249 107,035
----------- -----------
Cash at end of period $ 232,460 $ 118,522
=========== ===========
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) 19,333 1,033,883
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 nine-month periods ended November 30, 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 November 30, 2001, the cost of such inventory
held in the bonded warehouses was $10,811,072.
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 November 30, 2001, the Company had $19.9 million outstanding under the
facility.
Because of lower than expected net income in the first three quarters of
fiscal 2002, as of November 30, 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 November 30, 2001. The Bank has
-5-
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 Standards
------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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
$300,000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and the accounting and reporting provisions of
Accounting Principles Board Opinion ("APB") No. 30. This statement retains the
fundamental provisions of SFAS No. 121 and the basic requirements of APB No. 30;
however, it establishes a single accounting model to be used for long-lived
assets to be disposed of by sale and it expands the presentation of discontinued
operations to include more disposal transactions. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company does not anticipate that the
statement will have a material impact on its financial position or results of
operations.
-6-
6 - Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted
earnings per share:
Nine Months Ended November 30, Three Months Ended November 30,
------------------------------ -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Numerator:
Net income $ 1,103,625 $ 319,123 ($336,320) ($767,473)
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 1,103,625 $ 319,123 ($336,320) ($767,473)
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,681,294 10,674,500 10,681,294 10,681,294
Effect of dilutive securities:
Employee stock options - 21,680 - -
Warrants 10,753 520,256 - -
----------- ----------- ----------- -----------
Dilutive potential common shares 10,753 541,936 - -
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 10,692,047 11,216,436 10,681,294 10,681,294
=========== =========== =========== ===========
Basic earnings per share $ .10 $ .03 $ (.03) $ (.07)
Dilutive earnings per share $ .10 $ .03 $ (.03) $ (.07)
----------- ----------- ----------- -----------
-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 Nine-Month and Three-Month Periods
------------------------------------------------------------------------------
Ended November 30, 2001 and November 30, 2000
---------------------------------------------
Nine Months Ended November 30, 2001 Compared to 2000
----------------------------------------------------
Net income increased to $1,103,625 in the nine-month period ended November
30, 2001 (fiscal 2002) from $319,123 in the nine-month period ended November 30,
2000 (fiscal 2001), an increase of 246%. 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 309% 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 the ten branch operations opened during fiscal 2001 ("New Branches").
Such new branches typically incur costs prior to generating revenues 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 periods ended
November 30, 2001 and 2000, aggregate operating losses for the New Branches were
approximately $550,000 and $930,000, respectively.
Consolidated sales increased 15% in the nine-month period ended November
30, 2001, compared to the same period in 2000. Sales at the New Branches
aggregated $12.0 million in the nine-month period ended November 30, 2001,
compared to $2.0 million in the nine-month period ended November 30, 2000.
Same-store sales for the 37 branches open more than one year at the beginning of
the fiscal year (March 1) increased 8% in the nine-month period ended November
30, 2001, compared to a decrease of 1% in same-store sales in the same period of
2000. Same-store sales growth occurred at over 75% 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 nine-month
periods ended November 30, 2001, compared to 21.4% in 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 13% in the
nine-month period ended November 30, 2001 compared to the same period of 2000,
because of the costs associated with the New Branches. Expressed as a
percentage of sales, SG&A expenses decreased from 19.6% in 2000 to 19.3% 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 decreased 9% from 2000 to 2001, as lower interest rates on
the Company's variable rate debt mitigated the cost of additional debt incurred
to finance the New Branches in fiscal 2001. As a percentage of sales, interest
expense decreased from 1.7% in 2000 to 1.3% in 2001. Other non-operating income,
which consists primarily of finance charge collections,
-8-
increased 15% 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 November 30, 2001 Compared to 2000
-----------------------------------------------------
Net loss declined to $336,320 in the quarter ended November 30, 2001 from
$767,473 in the quarter ended November 30, 2000, a reduction of 56%. Such
improvement in results of operations was attributable to the same factors as
described above with respect to the nine-month period ended November 30, 2001.
In the quarters ended November 30, 2001 and 2000, aggregate operating losses of
the New Branches were approximately $305,000 and $580,000, respectively.
Sales increased 10% from the third quarter of fiscal 2001 to fiscal 2002,
with same-store sales increasing 6%. Sales at the New Branches aggregated $3.5
million in the quarter ended November 30, 2001, compared to $1.4 million in the
quarter ended November 30, 2000. A majority of the Company's branches generated
increased sales, with the largest percentage growth occurring in the
southeastern U.S. Sales in California remained stagnant for the second
consecutive quarter and, in Colorado, sales slowed significantly because of a
decline in residential new construction.
The Company's gross margin percentage on sales was 21.6% for the quarter
ended November 30, 2001, compared to 21.3% in 2000. Such increase was generally
attributable to an increase of 1.9% in the gross margin percentage at the New
Branches compared to the same quarter of the preceding year.
SG&A expenses as a percentage of sales decreased from 22.0% in 2000 to
21.5% in 2001, because of the operating leverage associated with same-store
sales growth. Interest expense decreased 30% from 2000 to 2001 principally as a
result of lower average interest rates on the Company's variable rate debt.
Liquidity and Capital Resources
-------------------------------
Current assets increased 9% from February 28, 2001 to November 30, 2001,
compared to a 21% increase during the same period in 2000. Gross accounts
receivable represented 49 days of gross sales as of November 30, 2001 compared
to 50 days at November 30, 2000, 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 6% in 2001, compared to an
increase of 22% in 2000. The increases in current assets and inventory in 2000
were associated with the opening of the New Branches, and the increases in 2001
are a function of the increase in sales over the previous year.
The Company has credit facilities with a commercial bank ("Bank") which
include a $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.
At November 30, 2001, the Company had available credit of $1.6 million and $0.4
million under the revolving credit line and the capital expenditure term loan
facility, respectively. At November 30, 2001, the outstanding balance on the
revolving credit line and the term loan facility bears interest at LIBOR plus
2.75% (currently 4.86%). 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
-9-
foreseeable future.
Because of lower than expected net income in the first three quarters of
fiscal 2002, as of November 30, 2001, 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 revisions 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, 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 $7 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.
Recently Issued Accounting Standards
------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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
$250,000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and the accounting and reporting provisions of
Accounting Principles Board Opinion ("APB") No. 30. This statement retains the
fundamental provisions of SFAS No. 121 and the basic requirements of APB No. 30;
however, it establishes a single accounting model to be used for long-lived
assets to be disposed of by sale and it expands the presentation of discontinued
operations to include more disposal transactions. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company does not anticipate that the
statement will have a material impact on its financial position or results of
operations.
-10-
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.
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.
-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 a portion of 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 November 30, 2001 the Company had $21.3 million outstanding under
its senior credit facility, of which $11.3 million is subject to variable
interest rates. 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 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.
January 14, 2002 /s/ Anthony R. Maresca
-------------------------------- -----------------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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