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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, 1998
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, 1998 - 10,634,303.
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, February 28,
1998 1998
----------- -----------
(Unaudited)
Current assets:
Cash $ 113,552 $ 90,000
Accounts receivable, net 15,601,525 11,888,542
Inventory 17,588,320 16,962,351
Prepaid expenses and other 562,408 611,873
Deferred income taxes 487,000 487,000
----------- -----------
Total current assets 34,352,805 30,039,766
----------- -----------
Property and equipment, net of accumulated
depreciation 3,739,318 3,713,827
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 5,919,913 5,962,700
Other assets 498,511 418,528
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$45,483,547 $41,107,821
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,377,980 $ 1,337,065
Accounts payable 17,982,930 14,009,495
Accrued expenses and other liabilities 1,576,304 1,146,211
----------- -----------
Total current liabilities 20,937,214 16,492,771
Long-term debt and capital lease obligations,
less current maturities 16,161,395 16,654,630
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Total liabilities 37,098,609 33,147,401
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Shareholders' equity:
Common stock 106,343 106,340
Additional paid-in capital 41,709,197 41,669,200
Accumulated deficit (33,430,602) (33,815,120)
----------- -----------
Total shareholders' equity 8,384,938 7,960,420
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$45,483,547 $41,107,821
=========== ===========
The accompanying notes are an integral part
of these condensed financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
May 31,
------------------------------
1998 1997
----------- -----------
Sales $28,151,734 $20,596,782
Cost of sales 22,334,003 16,471,861
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Gross profit 5,817,731 4,124,921
Selling, general and administrative expenses (4,990,257) (3,803,530)
Other operating income 40,977 137,954
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Operating income 868,451 459,345
Interest expense (502,204) (310,380)
Other non-operating income 48,971 41,763
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Income before income taxes 415,218 190,728
Provision for income taxes 30,700 10,310
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Net income $ 384,518 $ 180,418
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Weighted average shares outstanding:
Basic 10,634,067 10,371,555
Diluted 11,497,101 12,325,779
Earnings per common share:
Basic $ .04 $ .02
Diluted .03 .01
The accompanying notes are an integral part
of these condensed financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
May 31,
-----------------------
1998 1997
---------- ----------
Operating activities:
Net income $ 384,518 $ 180,418
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 286,078 210,364
Other 40,000 -
Changes in operating assets and liabilities:
Accounts receivable (3,712,983) (2,993,757)
Inventory (625,969) (1,893,928)
Prepaid expense and other assets (49,901) (118,378)
Accounts payable 3,973,435 4,816,173
Accrued expenses and other liabilities 430,093 76,499
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Net cash provided by operating activities 725,271 277,391
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Investing activities:
Acquisition of property and equipment (249,399) (244,449)
Acquisition of businesses, net of cash acquired - (72,409)
Proceeds from disposition of assets - 4,848
----------- ----------
Net cash used in investing activities (249,399) (312,010)
---------- ----------
Financing activities:
Proceeds from long-term debt - 516,728
Payment of long-term debt (452,320) (479,611)
---------- ---------
Net cash provided by (used in) financing activities (452,320) 37,117
---------- ---------
Net increase in cash 23,552 2,498
Cash at beginning of year 90,000 412,699
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Cash at end of period $ 113,552 $ 415,197
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Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired $ - $ 430,886
Fair value of liabilities assumed - (430,804)
Goodwill - 72,129
Purchase of equipment under capital
leases (net of cash paid) - 61,005
The accompanying notes are an integral part
of these condensed financial statements.
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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, 1998 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
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 prime rate plus 1/2%. 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.
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:
Three Months Ended
May 31, 1997
------------------
Sales $24,466,247
Net income 277,800
Earnings per common share:
Basic $ .03
Diluted .02
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. AND SUBSIDIARIES
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 - 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 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, 1998, the cost of such inventory held in the bonded
warehouses was $7,950,379.
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. The Company believes that substantially all consigned merchandise
will be sold in the ordinary course of business before any purchase obligation
is incurred.
4 - Income Taxes
The provision for income taxes consists principally of alternative
minimum taxes and 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 Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. It was effective in the
first quarter of fiscal 1999 and its adoption had no impact on the Company's net
income or shareholders' equity.
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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 Three-Month Periods Ended May 31,
1998 and May 31, 1997
Net income increased to $384,518 in the quarter ended May 31, 1998
(fiscal 1999) from $180,418 in the quarter ended May 31, 1997 (fiscal 1998), an
increase of 113%. The improvement in results of operations in fiscal 1999 was
generally attributable to favorable weather conditions during the month of May
in the southern and southeastern United States and to the operations of
Contractors Heating & Supply, Inc. ("CHS"), which was acquired by the Company in
September 1997.
Sales increased 37%, to $28,151,734 for the quarter ended May 31, 1998,
compared to $20,596,782 for the quarter ended May 31, 1997. 65% of the increase
in sales from 1997 to 1998 was a result of the Company's acquisitions in 1997.
Same store sales for 29 branches open for more than one year at the beginning of
the quarter increased 13% in the quarter ended May 31, 1998, compared to a
decrease of 3% in same store sales in the quarter ended May 31, 1997. The
greatest increases in same store sales occurred in Texas and Florida, where dry
weather and unusually warm temperatures, particularly in May, resulted in
increased demand for air conditioning products. In contrast, weather conditions
during the spring of 1997 were abnormally wet and cool, which restricted demand
for air conditioning products. The sales increase in Florida, where the Company
started operations in April 1996, is also a function of the expected growth
pattern when the Company opens new branches. In such cases, management expects
above average sales growth for up to five years as the new operations
continuously gain market share.
The Company's gross margin percentage on sales was 20.7% for the quarter
ended May 31, 1998, compared to 20.0% in 1997. The higher gross margin
percentage in 1998 is a result of the gross margin attained at the Company's
operations that were acquired in 1997. Excluding such acquired businesses, the
Company's gross margin percentage was unchanged from 1997 to 1998. The gross
margin percentage at CHS is positively affected by CHS's sheet metal fabrication
plant, which produces sheet metal products sold through it's distribution
operations.
Selling, general and administrative ("SG&A") expenses increased 31% in
the quarter ended May 31, 1998 compared to the same quarter of 1997, because of
the costs associated with both the acquired operations described above and the
increase in business at the Company's other operations. Expressed as a
percentage of sales, SG&A expenses decreased from 18.5% in 1997 to 17.7% in
1998. This decrease was attributable to both a low SG&A expense to sales ratio
at CHS and control over growth of SG&A expenses at the Company's other
operations.
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Other operating income declined from 1997 to 1998 because of the
discontinuation of an arrangement with a supplier under which the Company
recognized commission revenue for providing warehousing and shipping services to
another distributor of the supplier. In addition, energy services income
decreased 41% from 1997. In the quarter ended May 31, 1997, the Company obtained
data from its single remaining customer, which allowed the Company to bill the
customer additional amounts. The Company continues to provide 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 62% from 1997 to 1998 as a result of
additional borrowings, the majority of which were incurred to acquire CHS and
ACH Supply in 1997.
The provision for income taxes consists principally of alternative
minimum taxes and 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
Current assets increased 14% from February 28, 1998 to May 31, 1998,
principally in accounts receivable and inventory. Gross accounts receivable
represented 50 days of gross sales as of May 31, 1998, compared to 52 days of
gross sales in receivables at May 31, 1997, reflecting a significant increase in
April and May 1998 sales and positive collection efforts. The increase in
inventory from the end of fiscal 1998 is customary as the Company plans its
stocking levels for expected second quarter sales, which are greater than any
other fiscal quarter. However, management has emphasized efforts to control
inventory levels, and the increase in inventory from the end of February to the
end of May was only 4% in 1998, compared to 13% in 1997.
The Company has credit facilities with a commercial bank ("Bank") which
include an $18 million revolving line of credit and a $500,000 term loan
facility for the purchase of capital equipment. At May 31, 1998, the Company had
available credit of $4,779,360 and $116,410 under the revolving credit line and
the term loan facility, respectively. At May 31, 1998, substantially all of the
outstanding balance on the revolving credit line bears interest at LIBOR plus
3.00% (presently 8.69%), with the remainder of the revolving credit line and the
outstanding balance on the term loan facility bearing interest at the Bank's
prime rate plus 1/2% (presently 9%). Management believes that availability under
the revolving credit facility will be adequate to finance the Company's working
capital requirements of its existing operations for the foreseeable future.
The Company 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 equity, subordinated debt or some combination of
debt and equity. Although management has engaged in discussions with several
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potential investors or lenders, the Company has no commitment for additional
financing and cannot predict whether or when 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 June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. It was effective in the
first quarter of fiscal 1999 and its adoption had no impact on the Company's net
income or shareholders' equity.
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PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. 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.
July 15, 1998 /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
27 -- Financial Data Schedule