1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
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
- --------------------------------------------------------------------------------
(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 June 30, 1997 - 10,371,555.
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, February 28,
1997 1997
------------ ------------
(Unaudited)
Current assets:
Cash $ 415,197 $ 412,699
Accounts receivable, net 12,079,331 8,914,933
Inventory 15,762,208 13,667,019
Prepaid expenses and other 185,434 130,142
Deferred income taxes 347,000 347,000
----------- -----------
Total current assets 28,789,170 23,471,793
----------- -----------
Property and equipment, net of accumulated
depreciation 3,627,161 3,435,406
Deferred income taxes 693,000 693,000
Goodwill, net of accumulated amortization 2,749,638 2,657,500
Other assets 323,618 299,911
----------- -----------
$36,182,587 $30,557,610
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,380,690 $ 1,457,600
Accounts payable 15,032,339 9,925,146
Accrued expenses and other liabilities 1,088,731 1,008,972
----------- -----------
Total current liabilities 17,501,760 12,391,718
Long-term debt and capital lease obligations,
less current maturities 11,494,409 11,159,892
----------- -----------
Total liabilities 28,996,169 23,551,610
----------- -----------
Shareholders' equity:
Common stock 103,716 103,716
Additional paid-in capital 41,620,770 41,620,770
Accumulated deficit (34,538,068) (34,718,486)
----------- -----------
Total shareholders' equity 7,186,418 7,006,000
----------- -----------
$36,182,587 $30,557,610
=========== ===========
The accompanying notes are an integral part
of these condensed financial statements.
- 2 -
3
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended
May 31,
---------------------------
1997 1996
----------- -----------
Sales $20,596,782 $18,881,388
Cost of sales 16,471,861 15,289,616
----------- -----------
Gross profit 4,124,921 3,591,772
Selling, general and administrative expenses (3,803,530) (3,280,784)
Other operating income 137,954 165,290
----------- -----------
Operating income 459,345 476,278
Interest expense (310,380) (193,378)
Other non-operating income 41,763 33,672
----------- -----------
Income before income taxes 190,728 316,572
Provision for income taxes 10,310 9,235
----------- -----------
Net income $ 180,418 $ 307,337
=========== ===========
Average outstanding common and equivalent
shares 11,731,269 10,481,382
=========== ===========
Earnings per share $ .02 $ .03
=========== ===========
The accompanying notes are an integral part
of these condensed financial statements.
- 3 -
4
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months ended
May 31,
------------------------
1997 1996
---------- -----------
Operating activities:
Net income $ 180,418 $ 307,337
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 210,364 159,520
Increase (decrease) from changes in:
Accounts receivable (2,993,757) (2,863,965)
Inventory (1,893,928) (1,254,557)
Prepaid expense and other assets (118,378) (216,510)
Accounts payable 4,816,173 2,358,791
Accrued expenses and other liabilities 76,499 221,462
---------- ----------
Net cash provided by (used in) operating activities 277,391 (1,287,922)
---------- ----------
Investing activities:
Acquisition of property and equipment (244,449) (325,945)
Acquisition of businesses, net of cash acquired (72,409) -
Proceeds from disposition of assets 4,848 589
---------- ----------
Net cash used in investing activities (312,010) (325,356)
---------- ----------
Financing activities:
Proceeds from borrowings 516,728 1,900,000
Repayment of debt (479,611) (301,994)
---------- ---------
Net cash provided by financing activities 37,117 1,598,006
---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,498 (15,272)
Cash at beginning of year 412,699 348,162
---------- ----------
Cash at end of period $ 415,197 $ 332,890
========== ==========
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries
Fair value of assets acquired $ 430,886 $ -
Fair value of liabilities acquired (430,804) -
Goodwill 72,129 -
Purchase of equipment under capital
leases (net of cash paid) $ 61,005 $ 240,431
The accompanying notes are an integral part
of these condensed financial statements.
- 4 -
5
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 - Basis of Presentation
The interim financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normally
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. The results of operations
for the three month-period ended May 31, 1997 is not necessarily indicative of
the results to be expected for the full year.
Substantially all inventories represent finished goods held for sale.
2 - Acquisitions
In January 1997, the Company acquired all of the issued and outstanding
capital stock of Lifetime Filter, Inc. ("LFI"), a Texas corporation, and
contemporaneously therewith, LFI acquired all of the assets, and assumed all of
the liabilities, of the O'Leary Family Partnership, Ltd. ("OFP"), a Texas
limited partnership. Both LFI and the general partner of OFP had common
ownership. LFI is a manufacturer and distributor of electrostatic air filters
and sells its products directly to HVACR contractors. Unaudited pro forma
results of the Company's operations, as if the acquisitions of LFI and OFP had
occurred as of March 1, 1996, are as follows:
Three Months Ended
May 31, 1996
------------------
Sales $19,464,632
Net income 368,543
Earnings per share .04
These pro forma results are presented for comparative purposes only and
include certain adjustments to give effect to interest expense on acquisition
debt, amortization of goodwill and additional depreciation expense as a result
of a step-up in the basis of fixed assets, together with related income tax
effects. They do not purport to be indicative of the results of operations
which actually would have resulted had the combination occurred on March 1,
1996, or of future results of the consolidated entities.
In April 1997, the Company acquired for approximately $70,000 the assets
and liabilities of ACH Supply, Inc. ("ACH"), a wholesale distributor of HVACR
products with two branches in the Los Angeles area. Pro forma results of
operations relating to this acquisition are not presented because the effects
of the acquisition would not be material.
- 5 -
6
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2 - Acquisitions (continued)
In May 1997, the Company entered into a letter of intent to acquire
the operating assets and related liabilities of Contractors Heating and Supply
Company ("CHS"), a Denver-based HVACR distributor with three branches in
Colorado and one in New Mexico. CHS had sales of approximately $20 million for
the year ended December 31, 1996. The purchase price of the assets and
liabilities of CHS is estimated at $6 million, of which $4.8 million will be
financed with additional bank borrowings under a committed loan facility that
the Company expects to close in the second quarter of fiscal 1998, and $1.2
million will be financed by the seller. The Company expects to conclude the
acquisition of CHS concurrent with the closing of the new loan facility.
3 - 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, Las
Vegas and Memphis, with payment due only when products are sold. Such
inventory is accounted for as consigned merchandise and is not recorded on the
Company's balance sheet. As of May 31, 1997, the cost of such inventory held
in the bonded warehouses was $14,230,942.
The terms of the consignment agreement with the supplier further
provide that merchandise not sold within a specified period of time must be
purchased by the Company. In June 1997, the Company incurred a purchase
obligation of approximately $780,000 for unsold cooling equipment. Management
believes that such equipment will be sold in the ordinary course of business at
prices equal to or in excess of the Company's cost.
4 - Income Taxes
The provision for income taxes consists principally of current state
income taxes. The Company has net operating loss and tax credit carryforwards
which offset substantially all of its federal taxable income.
5 - Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted by the
Company in the fourth quarter of fiscal 1998. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements, primary earnings per
share will be renamed basic earnings per share and will exclude the dilutive
effect of stock options, warrants and convertible securities. The Company has
determined that the impact of Statement No. 128 on the calculation of earnings
per share for the three-month periods ended May 31, 1997 and 1996 would not be
material.
- 6 -
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 Three-Month Periods Ended May 31,
1997 and May 31, 1996
Net income declined to $180,418 in the quarter ended May 31, 1997
(fiscal 1998) from $307,337 in the quarter ended May 31, 1996 (fiscal 1997), a
decrease of 41%. The decline in results of operations in fiscal 1998 was
generally attributable to higher interest expense and to weather conditions in
the Company's two largest markets, Texas and Georgia, where below normal
temperatures and above average rainfall restricted demand for air conditioning
products.
Sales increased 9%, to $20,596,782 for the quarter ended May 31, 1997,
compared to $18,881,388 for the quarter ended May 31, 1996. The increase in
sales from 1996 to 1997 was a result of the Company's acquisitions and store
openings during and after the quarter ended May 31, 1996. Same store sales for
21 branches open for more than one year at the beginning of the quarter
(excluding a branch of Valley Supply where sales were shifted to a new branch
opened in fiscal 1997) declined 3%. Sales at ACR Supply ("ACRS"), Total Supply
("TSI") and Valley Supply ("VSI"), declined 3%, 5% and 6%, respectively, from
1996 to 1997. For the quarter ended May 31, 1996, when same store sales
increased 29% from the preceding year, sales were favorably affected by record
high temperatures in Texas during the month of May.
The Company's gross margin percentage on sales was 20.0% for the
quarter ended May 31, 1997, compared to 19.0% in 1996. The higher gross margin
percentage in 1997 was a result of the gross margin attained at the Company's
operations that have been added since 1996. The Company's distribution
operations in Florida, which were started in May 1996, and in California, which
were acquired in April 1997, sell less HVACR equipment as a percentage of total
sales than most of the Company's other operations, and, accordingly, attain a
higher gross margin percentage on aggregate sales. Lifetime Filter, Inc.
("LFI"), which was acquired in January 1997, is a manufacturing business and
realizes a higher gross margin percentage than the Company's distribution
operations.
Selling, general and administrative expenses ("SG&A") increased 16% in
the quarter ended May 31, 1997, compared to the same quarter of 1996, because
of the costs associated with the added operations described above. Expressed
as a percentage of sales, SG&A expenses increased from 17.4% in 1996 to 18.5%
in 1997. Such increase is attributable to SG&A expenses at LFI and at ACH
Supply ("ACH"), the Company's California operation.
- 7 -
8
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three-Month Periods Ended May 31,
1997 and May 31, 1996 (continued)
Other operating income consists of both energy services income and
commission income received from a supplier to the Company for providing
warehousing and shipping services to another distributor of the supplier.
Commission income declined 41% from 1996 because of both a change in the
commission rate paid by the supplier and a reduction in orders from the other
distributor. Energy services income increased 92% from 1996 after the Company
obtained data from its single remaining customer, which allowed the Company to
bill the customer additional amounts. The Company provides energy management
services on a month-to-month basis to the customer, and management cannot
estimate how long such an informal arrangement may continue. However, the
customer is partially dependent on the Company for the proper operation of its
HVACR systems.
Interest expense increased 61% from 1996 to 1997 as a result of the
Company's increased borrowings, including acquisition indebtedness.
The provision for income taxes consists principally of state income
taxes. As a result of the Company's substantial tax loss carryforwards, the
Company has minimal liability for Federal income taxes. See Liquidity and
Capital Resources, below.
Liquidity and Capital Resources
Working capital increased from $11,080,075 at February 28, 1997 to
$11,287,410 at May 31, 1997. Current assets increased 23% principally in
accounts receivable and inventory. Gross accounts receivable represented 52
days of gross sales as of May 31, 1997, compared to 57 days of gross sales in
receivables at the end of fiscal 1997, reflecting normal seasonal improvement.
The increase in inventory from the end of fiscal 1997 is customary as the
Company plans its stocking levels for expected second quarter sales, which are
greater than in any other fiscal quarter.
At May 31, 1997, the Company had fully utilized the borrowings
available under its bank line of credit and has obtained a firm commitment from
its bank lender ("Bank") to refinance the existing $8 million credit line with
a new $18 million revolving credit facility, including a $1 million sub-
facility for letters of credit. The new revolving credit facility will provide
for borrowings, at the Company's option, at either the Bank's prime rate plus
1/2% or LIBOR plus 3.00%. Borrowings under the new facility will be limited to
85% of eligible accounts receivable and 50% of eligible inventory amounts. As
a result of the Company's acquisitions during fiscal 1997, the Company was not
in compliance with certain financial covenants under the revolving line of
credit at May 31, 1997. The Company has obtained waivers of such debt covenant
violations from the Bank through August 31, 1997.
- 8 -
9
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
In May 1997, the Company entered into a letter of intent to acquire
Contractors Heating & Supply Company ("CHS"), a Denver-based HVACR distributor.
The purchase price of the assets and liabilities of CHS is estimated at $6
million of which $4.8 million will be financed by the Bank under the proposed
new credit facility, and $1.2 million will be financed by the seller. The
Company expects to conclude the acquisition of CHS concurrent with the closing
of the new loan facility. In addition, the increased facility should provide
adequate funds to finance the expected growth in the Company's operations
during the remainder of fiscal 1998.
In April 1997, the Company acquired for approximately $70,000 the
assets and liabilities of ACH, which has two branches in the Los Angeles area.
In April 1997, the Company also borrowed an additional $450,000 from The
Catalyst Fund, Ltd. ("Catalyst"), the proceeds of which were used to purchase
ACH and to provide working capital for ACH. The payment terms and the interest
rate of the additional borrowings are substantially the same as for the
Company's previously existing loan from Catalyst.
The Company has approximately $33 million in tax loss carryforwards
and $1.1 million in tax credit carryforwards. Such operating loss and tax
credit carryforwards will substantially limit the Company's federal income tax
liabilities in the near future.
Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted by the
Company in the fourth quarter of fiscal 1998. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements, primary earnings per
share will be renamed basic earnings per share and will exclude the dilutive
effect of stock options, warrants and convertible securities. The Company has
determined that the impact of Statement No. 128 on the calculation of earnings
per share for the three-month periods ended May 31, 1997 and 1996 would not be
material.
- 9 -
10
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) On April 9, 1997 the Company filed Form 8-K/A, amending its Form 8-K
dated January 24, 1997, to include the financial statements required
under Item 7. relating to the Company's acquisitions of the O'Leary
Family Partnership, Ltd. and Lifetime Filter, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACR GROUP, INC.
July 21, 1997 /s/ Anthony R. Maresca
- --------------------- --------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
- 10 -
11
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
- 11 -