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 August 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
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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, Smite 440, Houston, Texas 77042
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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, 1997 - 10,379,992.
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, February 28,
1997 1997
------------ ------------
(Unaudited)
Current assets:
Cash $ 496,992 $ 412,699
Accounts receivable, net 13,334,359 8,914,933
Inventory 14,437,228 13,667,019
Prepaid expenses and other 172,740 130,142
Deferred income taxes 347,000 347,000
------------ ------------
Total current assets 28,788,319 23,471,793
------------ ------------
Property and equipment, net of accumulated
depreciation 3,655,773 3,435,406
Deferred income taxes 693,000 693,000
Goodwill, net of accumulated amortization 2,760,486 2,657,500
Other assets 463,199 299,911
------------ ------------
$ 36,360,777 $ 30,557,610
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,418,642 $ 1,457,600
Accounts payable 14,261,340 9,925,146
Accrued expenses and other liabilities 1,398,280 1,008,972
------------ ------------
Total current liabilities 17,078,262 12,391,718
Long-term debt, less current maturities 11,326,020 11,159,892
------------ ------------
Total liabilities 28,404,282 23,551,610
------------ ------------
Shareholders' equity:
Common stock 103,800 103,716
Additional paid-in capital 41,621,740 41,620,770
Accumulated deficit (33,769,045) (34,718,486)
------------ ------------
Total shareholders' equity 7,956,495 7,006,000
------------ ------------
$ 36,360,777 $ 30,557,610
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six months ended Three months ended
August 31, August 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Sales $ 48,223,439 $ 44,029,682 $ 27,626,657 $ 25,148,294
Cost of sales 38,772,525 35,540,071 22,300,664 20,250,455
------------ ------------ ------------ ------------
Gross profit 9,450,914 8,489,611 5,325,993 4,897,839
Selling, general and
administrative expenses (8,037,034) (7,261,992) (4,233,504) (3,981,208)
Other operating income 184,475 257,159 46,521 91,869
------------ ------------ ------------ ------------
Operating income 1,598,355 1,484,778 1,139,010 1,008,500
Interest expense (688,310) (440,060) (377,930) (246,682)
Other non-operating income 81,206 72,037 39,443 38,365
------------ ------------ ------------ ------------
Income before taxes 991,251 1,116,755 800,523 800,183
Provision for income taxes (41,810) (31,840) (31,500) (22,605)
------------ ------------ ------------ ------------
Net income 949,441 $ 1,084,915 $ 769,023 777,578
============ ============ ============ ============
Average outstanding common
and equivalent shares 11,671,144 10,600,841 11,608,338 10,713,751
============ ============ ============ ============
Earnings per share $ .08 $ .10 $ .07 $ .07
============ ============ ============ ============
The accompanying notes are an integral part of these condensed
financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
August 31,
----------------------------
1997 1996
----------- -----------
Operating activities:
Net income $ 949,441 $ 1,084,915
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 429,677 331,756
Stock issued as compensation -- 125,000
Changes in operating assets and liabilities:
Accounts receivable (4,229,785) (3,142,638)
Inventory (568,948) (1,996,297)
Prepaid expense and other assets (255,314) (181,248)
Accounts payable 4,025,174 1,327,394
Accrued expenses and other liabilities 370,552 588,621
----------- -----------
Net cash provided by (used in) operating activities 720,797 (1,862,497)
----------- -----------
Investing activities:
Acquisition of property and equipment, net (324,048) (386,078)
Acquisition of businesses, net of cash acquired (90,956) --
----------- -----------
Net cash used in investing activities (415,004) (386,078)
----------- -----------
Financing activities:
Proceeds from long-term debt 525,478 2,571,862
Payment of long-term debt (748,032) (452,982)
Exercise of stock options 1,054 --
----------- -----------
Net cash provided by (used in) financing
activities (221,500) 2,118,880
----------- -----------
Net increase (decrease) in cash 84,293 (129,695)
Cash at beginning of year 412,699 348,162
----------- -----------
Cash at end of period $ 496,992 $ 228,467
=========== ===========
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired 430,776
Fair value of liabilities acquired 447,381
Goodwill 112,836
Purchase of equipment under capital
leases (net of cash paid) 190,239 331,349
The accompanying notes are an integral part of these condensed
financial statements.
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ACR GROUP, INC.
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, 1997 are 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:
Six Months Ended Three Months Ended
August 31, 1996 August 31, 1996
---------------- ------------------
Sales $45,405,288 $25,940,656
Net income 1,349,028 980,486
Earnings per share .13 .09
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.
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ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2 - Acquisitions (continued)
On September 9, 1997, the Company, through a wholly-owned subsidiary,
acquired certain of the assets, and assumed certain of the liabilities, of
Contractors Heating and Supply Company ("CHS"). CHS was paid $4,626,315 cash at
closing, and received a promissory note ("Note") for $1,200,000. The
liabilities assumed by the Company's subsidiary included $1,200,000 owed by CHS
to certain of its shareholders, and was paid in full at closing by the
Company's subsidiary. The Note bears interest at 8 1/2% per annum. The Note is
to be repaid in three annual principal installments of $400,000 each, plus
accrued interest, beginning September 1, 1998, and is secured by a first lien
on machinery and equipment purchased from CHS that is used to fabricate sheet
metal products. The Note is subordinated to the Company's indebtedness to its
senior secured lender (Note 3). The acquisition will be accounted for using the
purchase method of accounting. The Company will file audited financial
statements of CHS as of December 31, 1996 and 1995, and for the years then
ended, and pro forma financial statements of the Company as of August 31, 1997,
with the Securities and Exchange Commission on Form 8-K/A no later than
November 24, 1997.
3 - Debt
On August 27, 1997, the Company closed a revolving credit facility ("New
Facility") with its bank lender ("Bank"). The New Facility has a capacity of
$18 million, and borrowings are limited to 85% of eligible accounts receivable
and 50% of eligible inventory amounts. The Company has the option of paying
interest on the New Facility at either the Bank's prime rate plus 1/2% or LIBOR
plus 3%. The New Facility was funded by the Bank on September 8, 1997, and $7.4
million was used to repay outstanding borrowings under the Company's former
line of credit with the Bank. Subsequently, the Company has also borrowed $5.7
million to acquire the business of CHS and approximately $1 million for
additional working capital. The New Facility matures on August 31, 2000.
4 - 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 August 31, 1997, the cost of such inventory held in the
bonded warehouses was $10,698,250.
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ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4 - Contingent Liabilities (continued)
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. As of August 31, 1997, the Company owed approximately $220,000
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.
5 - 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.
6 - Recently Issued Accounting Standards
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 six-month and three-month periods ended August 31, 1997 and
1996 would not be material.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which is required to be
adopted by the Company in fiscal 1999. At that time, the Company will be
required to present financial and descriptive information about its operating
segments under the "management approach" versus the "industry segment
approach". The Company is currently evaluating the impact of the new statement
on the financial disclosure of the Company.
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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, 1997 and August 31, 1996
Six Months Ended August 31, 1997 Compared to 1996
Net income declined 12% to $949,441 for the six months ended August 31,
1997 (fiscal 1998), compared to $1,084,915 for the six months ended August 31,
1996 (fiscal 1997). This decline was generally attributable to higher interest
expense and to weather conditions in three of the Company's largest markets,
Texas, Georgia and Tennessee, where below average temperatures and above
average rainfall from March through June 1997 reduced demand for air
conditioning products.
Consolidated sales increased 10% from fiscal 1997 to 1998, with the
increase attributable to sales at locations opened or acquired after the
beginning of fiscal 1997. Sales at 21 branches that had been open more than a
year at the beginning of fiscal 1997 declined 1% in the first six months of
fiscal 1998, compared to fiscal 1997, Growth in sales was strongest at stores
in the Houston area and in south Georgia, with stores in the Atlanta area and
central Texas experiencing the sharpest declines. After increases in excess of
20% in each of the past three years, sales at Heating and Cooling Supply in Las
Vegas were unchanged from fiscal 1997 to 1998.
The Company's gross margin percentage on sales was 19.6% for the six-month
period ended August 31, 1997, compared to 19.3% in 1996. The higher gross
margin percentage in 1997 is a result of the gross margin attained at the
Company's operations that have been added since 1996. The Company's
distribution operations in both Florida and California 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") is a manufacturing business and
realizes a higher gross margin percentage than the Company's distribution
operations. The higher gross margin percentages realized at the newer
operations have been partially offset in fiscal 1998 by a decline in gross
margin in Texas and Tennessee in response to unusually competitive market
conditions resulting from slower overall sales in those areas.
Selling, general and administrative ("SG&A") expenses have increased 11%
from fiscal 1997 to 1998, because of the costs associated with the added
operations described above. Expressed as a percentage of sales, SG&A expenses
increased from 16.5% in fiscal 1997 to 16.7% in fiscal 1998.
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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 has declined 45% from fiscal 1997 to fiscal 1998 because of
both a reduction in the commission rate paid by the supplier and a reduction in
orders from the other distributor. Energy services income from the Company's
sole customer has increased 7% from fiscal 1997 to 1998. 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 56% from fiscal 1997 to fiscal 1998 as a result
of the Company's increased borrowings, principally for acquisition
indebtedness. Interest expense in fiscal 1998 also includes $69,000 paid to an
equipment supplier for extended payment terms compared to $14,000 paid in
fiscal 1997.
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.
Three Months Ended August 31, 1997 Compared to 1996
Much of the preceding analysis with respect to the six-month periods ended
August 31, 1997 and 1996 is applicable to the three-month periods then ended.
Net income decreased 1%, from $777,578 in 1996 to $769,023 In 1997. After
extraordinarily temperate weather conditions prevailed through June 1997, as
described above, normal summer weather conditions existed from the middle of
July through August. With its sales consisting principally of air conditioning
products because of its geographic concentration in the Sun Belt, the Company's
sales and results of operations are subject to significant seasonal
fluctuations. In the Company's fiscal year, the second quarter, ending August
31, is the most profitable and has the greatest sales volume.
Consolidated sales increased 10% from 1996 to 1997, with sales increasing
in all market areas except the Atlanta area. As for the Company's recently
acquired operations, sales at ACH exceeded the Company's expectations as
unusually hot weather prevailed in southern California, while sales at LFI were
less than the Company's expectations because of a lower volume of orders from
LFI's largest customer.
Gross margin percentage in the quarter ended August 31, 1997 was 19.3%,
compared to 19.5% in 1996. The decline in gross margin percentage was
attributable to highly competitive pricing that was necessary to retain market
share and to special pricing considerations given to certain large customers in
Texas.
SG&A expenses as a percentage of sales decreased from 15.8% in 1996 to
15.3% in 1997. In the quarter ended August 31, 1996, the Company recorded a
non-recurring compensation charge of $125,000. Interest expense increased from
1996 to 1997 for the reasons stated above, including $65,000 paid to a vendor
in 1997 for extended payment terms, compared to $13,000 paid in 1996.
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Liquidity and Capital Resources
Working capital increased from $11,080,075 at February 28, 1997 to
$11,710,057 at August 31, 1997. Current assets increased 23%, principally in
accounts receivable and inventory, reflecting expected seasonal trends. Gross
receivables represented 48 days of sales at August 31, 1997, compared to 57
days at February 28, also reflecting the usual seasonal adjustment.
On August 27, 1997, the Company closed a revolving credit facility ("New
Facility") with its bank lender ("Bank"). The New Facility has a capacity of $18
million, and borrowings are limited to 85% of eligible accounts receivable and
50% of eligible inventory amounts. The Company has the option of paying
interest on the New Facility at either the Bank's prime rate plus 1/2% or LIBOR
plus 3%. The New Facility was funded by the Bank on September 8, 1997, and $7.4
million was used to repay outstanding borrowings under the Company's former
line of credit with the Bank. Subsequently, the Company has also borrowed $5.7
million to acquire the business of Contractors Heating and Supply Company
("CHS") and approximately $1 million for additional working capital. Management
believes that availability under the New Facility will be adequate to finance
the Company's working capital requirements for both growth in existing business
and expansion of branch operations for the foreseeable future. The New Facility
matures on August 31, 2000.
On September 9, 1997, the Company, through a wholly-owned subsidiary,
acquired certain of the assets, and assumed certain of the liabilities, of CHS.
CHS was paid $4,626,315 cash at closing, and received a promissory note
("Note") for $1,200,000. The liabilities assumed by the Company's subsidiary
included $1,200,000 owed by CHS to certain of its shareholders, and was paid in
full at closing by the Company's subsidiary. The Note bears interest at 8 1/2%
per annum. The Note is to be repaid in three annual principal installments of
$400,000 each, plus accrued interest, beginning September 1, 1998, and is
secured by a first lien on machinery and equipment purchased from CHS that is
used to fabricate sheet metal products. The Note is subordinated to the New
Facility.
The Company is actively considering additional financing alternatives in
order to continue its plan of acquiring other HVACR distribution companies.
Such financing may be in the form of subordinated debt, equity or some
combination of debt and equity. Although management has engaged in discussions
with several potential lenders or investors, the Company has no commitment for
additional financing and cannot predict whether or when any such additional
financing may materialize. Management is also reviewing. the suitability of
several acquisition opportunities, but has not entered into letters of intent
to acquire any companies. The Company's ability to consummate a significant
acquisition would be dependent upon obtaining additional financing.
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.
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Recently Issued Accounting Standards
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 six-month periods ended August 31, 1997 and 1996 would not be
material.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which is required to be
adopted by the Company in fiscal 1999. At that time, the Company will be
required to present financial and descriptive information about its operating
segments under the "management approach" versus the "industry segment
approach". The Company is currently evaluating the impact of the new statement
on the financial disclosure of the Company.
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PART II - OTHER INFORMATION
Item 4. - Results of Votes of Security Holders
At the Annual Meeting of Shareholders on August 21, 1997, 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 6,363,912 1,550
Ronald T. Nixon 6,363,912 1,550
Alex Trevino, Jr. 6,363,712 1,750
A. Stephen Trevino 6,363,912 1,550
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Loan and Security Agreement between ACR Group, Inc. and NationsBank
of Texas, N.A. dated as of August 27, 1997.
10.2 First Amendment to Loan and Security Agreement between ACR Group,
Inc. and NationsBank of Texas, N.A. dated as of September 9, 1997.
27.1 Financial Data Schedule.
(b) No report on Form 8-K was filed during the quarter ended August 31, 1997.
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, l997 /s/ Anthony R. Maresca
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Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
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10.1 Loan and Security Agreement between ACR Group, Inc. and
NationsBank of Texas, N.A. dated as of August 27, 1997.
10.2 First Amendment to Loan and Security Agreement between
ACR Group, Inc. and NationsBank of Texas, N.A. dated as
of September 9, 1997.
27.1 Financial Data Schedule.