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 November 30, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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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
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Shares of Common Stock outstanding at December 31, 1997 - 10,379,992.
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, February 28,
1997 1997
------------ ------------
(Unaudited)
Current assets:
Cash $ 87,494 $ 412,699
Accounts receivable, net 14,192,445 8,914,933
Inventory 15,748,102 13,667,019
Prepaid expenses and other 372,111 130,142
Deferred income taxes 487,000 347,000
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Total current assets 30,887,152 23,471,793
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Property and equipment, net of accumulated
depreciation 3,807,414 3,435,406
Deferred income taxes 973,000 693,000
Goodwill, net of accumulated amortization 6,467,303 2,657,500
Other assets 353,283 299,911
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$42,488,152 $30,557,610
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,575,708 $ 1,457,600
Accounts payable 12,772,019 9,925,146
Accrued expenses and other liabilities 2,035,490 1,008,972
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Total current liabilities 16,383,217 12,391,718
Long-term debt, less current maturities 17,307,188 11,159,892
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Total liabilities 33,690,405 23,551,610
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Shareholders' equity:
Common stock 103,800 103,716
Additional paid-in capital 41,621,740 41,620,770
Accumulated deficit (32,927,793) (34,718,486)
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Total shareholders' equity 8,797,747 7,006,000
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$42,488,152 $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)
Nine months ended Three months ended
November 30, November 30,
------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Sales $74,921,276 $62,911,596 $26,697,837 $18,881,914
Cost of sales 59,594,561 50,792,694 20,822,036 15,252,623
----------- ----------- ----------- -----------
Gross profit 15,326,715 12,118,902 5,875,801 3,629,291
Selling, general and
administrative expenses (13,034,614) (10,569,431) (4,997,580) (3,307,439)
Other operating income 241,273 337,941 56,798 80,782
----------- ----------- ----------- -----------
Operating income 2,533,374 1,887,412 935,019 402,634
Interest expense (1,233,646) (675,073) (545,336) (235,013)
Other non-operating income 144,104 96,359 62,898 24,322
----------- ----------- ----------- -----------
Income before taxes 1,443,832 1,308,698 452,581 191,943
Provision (benefit) for income
taxes:
Current 73,139 45,509 31,329 13,669
Deferred (420,000) - (420,000) -
----------- ----------- ----------- -----------
Net income $ 1,790,693 $ 1,263,189 $ 841,252 $ 178,274
=========== =========== =========== ===========
Average outstanding common
and equivalent shares 11,658,806 10,957,049 11,629,387 11,206,003
=========== =========== =========== ===========
Earnings per share $ .15 $ .12 $ .07 $ .02
=========== =========== =========== ===========
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)
Nine months ended
November 30,
-----------------------
1997 1996
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Operating activities:
Net income $1,790,693 $1,263,189
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 698,816 511,712
Deferred income taxes (420,000) -
Stock issued as compensation - 125,000
Changes in operating assets and liabilities:
Accounts receivable (3,315,751) (2,739,160)
Inventory 300,721 (831,292)
Prepaid expense and other assets (149,301) (170,385)
Accounts payable 1,089,207 (504,630)
Accrued expenses and other liabilities 666,722 636,178
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Net cash provided from (used in) operating activities 661,107 (1,709,388)
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Investing activities:
Acquisition of property and equipment, net (492,052) (538,713)
Acquisition of businesses, net of cash acquired (5,478,177) -
Proceeds from disposition of assets 267,183 -
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Net cash used in investing activities (5,703,046) (538,713)
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Financing activities:
Proceeds from long-term debt 13,389,674 2,701,862
Payment of long-term debt (8,673,994) (539,848)
Exercise of stock options 1,054 -
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Net cash provided by financing activities 4,716,734 2,162,014
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Net decrease in cash (325,205) (86,087)
Cash at beginning of year 412,699 348,162
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Cash at end of period $ 87,494 $ 262,075
========== ==========
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired $5,702,433 $ -
Fair value of liabilities acquired 4,099,618 -
Goodwill 3,865,179 -
Purchase of equipment under capital leases
(net of cash paid):
For notes payable - 250,000
Under capital leases 190,239 375,293
Sale of property for note receivable (201,136) -
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 nine-month periods ended November 30,
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
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 described above was accounted for using the purchase
method of accounting. Unaudited pro forma results of the Company's operations,
as if the acquisition of CHS had occurred as of March 1, 1997, are as follows:
Nine Months Ended
November 30, 1997
-----------------
Sales $84,390,816
Net income 1,881,173
Earnings per share .16
These pro forma results are presented for comparative purposes only
and include certain adjustments to give effect to occupancy cost for facilities
leased from CHS, 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, 1997, or of future results of the
consolidated entities.
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ACR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2 - Acquisitions (continued)
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.
3 - Debt
On August 27, 1997, the Company closed a revolving credit facility
("New Facility") with its bank lender ("Bank"). 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. In
September 1997, the Company also borrowed $5.7 million under the New Facility
to acquire CHS. The New Facility has a maximum availability 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 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 November 30, 1997, the cost of such inventory
held in the bonded warehouses was $7,762,894.
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. Management believes that substantially all consigned
merchandise on hand at November 30, 1997 will be sold in the ordinary course of
business before any purchase obligation is incurred.
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ACR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The deferred tax
benefit recognized in the quarter ended November 30, 1997 represents a
reduction in the valuation allowance established against the Company's deferred
tax asset. Management believes that, as a result of the acquisition of CHS, a
reduction in the valuation allowance is appropriate based on its evaluation of
the expected future utilization of the Company's net operating loss
carryforwards.
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 nine-month and three-month periods ended November
30, 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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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 Nine-Month and Three-Month Periods
Ended November 30, 1997 and November 30, 1996
Nine Months Ended November 30, 1997 Compared to 1996
Net income increased to $1,790,693 for the nine months ended November
30, 1997 (fiscal 1998), compared to $1,263,189 for the nine months ended
November 30, 1996 (fiscal 1997), an increase of 42%. The increase in net
income is attributable to the results of operations at Lifetime Filter, Inc.
("LFI") and at Contractors Heating and Supply, Inc. ("CHS"), which were
acquired by the Company in January 1997 and September 1997, respectively, and
to a reduction in the deferred tax asset valuation allowance in the quarter
ended November 30, 1997. These factors more than offset higher interest costs
and a decline in operating income at the Company's Georgia and Tennessee
operations which have been adversely affected in fiscal 1998 by weather
conditions which produced below average temperatures and above average rainfall
during the spring and much of the summer of 1997, thereby reducing demand for
air conditioning products.
Consolidated sales increased 19% 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 increased 1% in the first nine 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.
The Company's gross margin percentage on sales was 20.5% for the
nine-month period ended November 30, 1997, compared to 19.3% in 1996. The
higher gross margin percentage in 1997 is a result of 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. LFI and CHS both have a
significant manufacturing component of their business and realize a higher
gross margin percentage than the Company's distribution operations. At its
Florida operations, which the Company opened in 1996, the Company has raised
its gross margin percentage by 2.5% in 1997 compared to 1996, when it cut
prices to help obtain its initial customer base.
Selling, general and administrative ("SG&A") expenses, expressed as a
percentage of sales, increased from 16.8% in fiscal 1997 to 17.4% in fiscal
1998. Such increase is attributable to SG&A expenses at LFI and CHS, and at
ACH Supply ("ACH"), the Company's California operation that was acquired in
April 1997. The Company expects SG&A expense as a percentage of sales to be
somewhat higher at its manufacturing operations than at its distribution
operations.
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9
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 40% 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 supplier. Energy services income from the Company's sole
customer has decreased 3% 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 83% from fiscal 1997 to fiscal 1998 as a
result of the Company's increased borrowings, principally for acquisition
indebtedness.
The current provision for income taxes consists principally of state
income taxes. As a result of its substantial tax loss carryforwards, the
Company has minimal liability for federal income taxes. See Liquidity and
Capital Resources, below. In the quarter ended November 30, 1997, the Company
recognized a deferred tax benefit of $420,000. Management believed that, as a
result of the acquisition of CHS, it was appropriate to reduce the valuation
allowance established against its deferred tax asset based on its evaluation of
the expected future utilization of the Company's net operating loss
carryforwards.
Three Months Ended November 30, 1997 Compared to 1996
Much of the preceding analysis with respect to the nine-month periods
ended August 31, 1997 and 1996 is applicable to the three-month periods then
ended. Most significantly, the Company acquired CHS in September 1997, and
CHS's operations are included in the Company's consolidated financial
statements beginning with the quarter ended November 30, 1997. Net income
increased 372%, from $178,274 in 1996 to $841,252 in 1997, largely because of
both the deferred tax benefit discussed above and CHS's results of operations.
Unlike the Company's other operations, which are geographically concentrated in
the Sun Belt and are most profitable in the second quarter of the Company's
fiscal year, CHS, which is based in Denver and operates in both Colorado and
New Mexico, sells substantially more heating than air conditioning products and
is typically more profitable in the third quarter of the Company's fiscal year.
Consolidated sales increased 41% from 1996 to 1997, with sales
increasing in all markets except the Atlanta and Nashville areas. Sales at CHS
represented 63% of the increase from 1996. In Texas, sales increased 19%
compared to 1996, after experiencing only 3% growth in the first two quarters
of fiscal 1998 because of unseasonably cool and wet weather early in the year.
Gross margin percentage in the quarter ended November 30, 1997
increased to 22.0%, compared to 19.2% in 1996, principally as a result of the
gross margin percentage at CHS. Additionally, after meeting several
competitive price situations and accepting large volume, low price orders to
retain market share in Texas earlier in the year, the Company was able to
regain its customary gross margin percentage in the third quarter as normal
weather patterns combined with a robust economy helped to boost sales.
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10
SG&A expenses as a percentage of sales increased from 17.5% in 1996 to
18.7% in 1997. Interest expense increased 132% from 1996 to 1997, as the
Company borrowed funds to acquire CHS.
Liquidity and Capital Resources
Working capital increased from $11,080,075 at February 28, 1997 to
$14,503,935 at November 30, 1997. Current assets increased 32%, principally in
accounts receivable and inventory, reflecting expected seasonal trends and the
acquisition of CHS. Gross receivables represented 54 days of sales at November
30, 1997, compared to 52 days at November 30, 1996.
In August 1997, the Company closed a revolving credit facility ("New
Facility") with its bank lender ("Bank"). The New Facility was funded 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. In September 1997,
the Company also borrowed $5.7 million under the New Facility to acquire CHS.
The New Facility has a maximum availability of $18 million, and borrowings are
limited to 85% of eligible accounts receivable and 50% of eligible inventory
amounts. As of November 30, 1997, the Company had unused availability of $2.2
million under the New Facility. The Company may pay interest on the New
Facility at either the Bank's prime rate plus 1/2% or LIBOR plus 3%, and the
Company has elected the LIBOR option with respect to $12 million of the $12.9
million outstanding under the New Facility as of November 30, 1997. The New
Facility includes a feature whereby the Company's cash balances with its lender
are concentrated daily to reduce the outstanding borrowings under the New
Facility. 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.
In connection with the CHS acquisition in September 1997, the Company
paid to the Seller $4,626,315 cash at closing, and issued a promissory note
("Note") to the Seller for $1,200,000. 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 by CHS from the
Seller that is used to fabricate sheet metal products. The Note is
subordinated to the New Facility. The indebtedness assumed by CHS included
$1,200,000 owed by the Seller to certain of its shareholders, and was paid in
full at closing by CHS.
In September 1997, the Company sold at its carrying value a parcel of
land that it had acquired in Las Vegas to a partnership that includes members
of management of HCS. The partnership is constructing a building to be
occupied by HCS, and HCS has entered into a ten year lease for the building
commencing upon completion of construction. In connection with its sale of the
land, the Company received cash proceeds of $250,000, which was used to repay
mortgage indebtedness on the property, and a note from the partnership for
$201,136. The note is due in monthly installments from January 1998 through
November 1998.
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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 $32 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 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 nine-month and three-month periods ended November
30, 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" vesus 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 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On September 9, 1997, the Company filed Form 8-K to report the
acquisition of Contractors Heating and Supply Company.
On November 24, 1997, the Company filed Form 8-K/A, amending its
Form 8-K dated September 9, 1997, to include the financial statements
required under Item 7 relating to the Company's acquisition of
Contractors Heating and Supply Company.
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, 1998 /s/ Anthony R. Maresca
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Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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INDEX TO EXHIBITS
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On September 9, 1997, the Company filed Form 8-K to report the
acquisition of Contractors Heating and Supply Company.
On November 24, 1997, the Company filed Form 8-K/A, amending its
Form 8-K dated September 9, 1997, to include the financial statements
required under Item 7 relating to the Company's acquisition of
Contractors Heating and Supply Company.