<PAGE>
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, 1995.
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) 780-853
(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, 1995 - 10,246,555.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, February 28,
1995 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 377,301 $ 162,745
Accounts receivable, net 7,845,662 4,720,279
Inventory 7,794,487 8,353,511
Prepaid expenses and other 236,233 366,888
Deferred income taxes 136,000 136,000
----------- -----------
Total current assets 16,389,683 13,739,423
----------- -----------
Property and equipment, net of accumulated
depreciation 1,899,080 1,268,771
Deferred income taxes 544,000 544,000
Goodwill, net of accumulated amortization 1,366,609 1,384,933
Other assets 144,794 194,617
----------- -----------
$20,344,166 $17,131,744
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 685,678 $ 686,447
Accounts payable 7,123,877 6,738,283
Accrued expenses and other liabilities 732,076 496,770
----------- -----------
Total current liabilities 8,541,631 7,921,500
Long-term debt, less current maturities 5,597,093 3,727,798
----------- -----------
Total liabilities 14,138,724 11,649,298
----------- -----------
Shareholders' equity:
Common stock 102,466 102,466
Additional paid-in capital 41,427,020 41,427,020
Accumulated deficit (35,324,044) (36,047,040)
----------- -----------
Total shareholders' equity 6,205,442 5,482,446
----------- -----------
$20,344,166 $17,131,744
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
- 1 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Three months ended
August 31, August 31,
-------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $29,583,522 $22,607,869 $17,489,675 $13,178,496
Cost of sales 23,892,800 17,889,368 14,160,595 10,449,069
----------- ----------- ----------- -----------
Gross profit 5,690,722 4,718,501 3,329,080 2,729,427
Selling, general and
administrative expenses (4,784,364) (3,882,429) (2,570,497) (2,085,986)
Income from energy services,
net 89,137 37,197 33,259 19,592
----------- ----------- ----------- -----------
Operating income 995,495 873,269 791,842 663,033
Interest expense (298,647) (183,472) (165,916) (100,554)
Other non-operating income 33,648 24,777 19,653 16,695
----------- ----------- ----------- -----------
Income before taxes 730,496 714,574 645,579 579,174
Provision for income taxes (7,500) (1,000) (7,500) (1,000)
----------- ----------- ----------- -----------
Net income $ 722,996 $ 713,574 $ 638,079 $ 578,174
=========== =========== =========== ===========
Average outstanding common
and equivalent shares 10,587,252 10,626,076 10,558,958 10,740,157
=========== =========== =========== ===========
Earning per share $ .07 $ .07 $ .06 $ .05
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
- 2 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
August 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 722,996 $ 713,574
Adjustments to reconcile net income
to net cash (used in) operating
activities:
Depreciation and amortization 254,859 210,907
Increase (decrease) from changes in:
Accounts receivable (3,125,383) (1,887,144)
Inventory 559,024 (2,439,785)
Prepaid expense and other assets 166,890 115,035
Accounts payable 385,594 2,088,112
Accrued expenses and other liabilities 235,306 268,586
---------- ----------
Net cash used in operating activities (800,714) (930,715)
---------- ----------
Net cash used in investing activities:
Acquisition of property and equipment, net (641,336) (314,662)
---------- ----------
Financing activities:
Proceeds from borrowings 2,057,608 2,047,166
Repayment of debt (401,002) (425,960)
---------- ----------
Net cash provided by financing activities 1,656,606 1,621,206
---------- ----------
Net increase in cash and cash equivalents 214,556 375,829
Cash at beginning of year 162,745 50,279
---------- ----------
Cash at end of period $ 377,301 $ 426,108
========== ==========
Schedule of non-cash investing and
financing activities:
Purchase of equipment under capital
leases (net of cash paid) $ 211,920 $ 51,751
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
- 3 -
<PAGE>
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. Certain balances in the
1994 financial statements have been reclassified to conform to the 1995
presentation. The results of operations for the three and six-month periods
ended August 31, 1995 are not necessarily indicative of the results to be
expected for the full year.
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 Atlanta, 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, 1995, the cost of such inventory
held in the bonded warehouses was $3,933,799.
- 4 -
<PAGE>
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, 1995 AND AUGUST 31, 1994
SIX MONTHS ENDED AUGUST 31, 1995 COMPARED TO 1994
Net income increased to $722,996 for the six months ended August 31,
1995 (fiscal 1996), compared to $713,574 for the six months ended August 31,
1994 (fiscal 1995), an increase of 1%. Although sales in 1995 have increased
substantially from both gains in market share and additional branch
operations, lower gross margins and branch start-up costs have combined to
restrain growth in net income from the previous year. In each of the
Company's geographic markets, growth in sales from 1994 to 1995 is
significantly above the industry average of 6% indicated by trade association
statistics. Management has designed a strategy that emphasizes growth in
market share and branch operations with high sales volume and low overhead
costs as a percentage of sales. Management believes that to successfully
operate in the current business climate in the HVACR industry may require
companies to accept a lower gross margin percentage than has been historically
achieved.
Consolidated sales increased 31% from 1994 to 1995. Increased sales at
Valley Supply ("Valley"), which opened in late May 1994, represented 21% of
the increase in 1995. Sales at ACR Supply ("ACRS"), Total Supply ("TSI") and
Heating & Cooling Supply ("HCS") increased 18%, 52% and 20%, respectively,
from 1994 to 1995. The ACRS branch in McAllen, Texas, which opened in May
1995, is not yet profitable and accounted for only 10% of the increase in
ACRS's sales. Branches of ACRS located away from metropolitan areas showed
the largest increases in sales, as these branches further strengthened their
hold in the respective market areas. The increase in sales at TSI is
principally attributable to the opening of the Forest Park branch in April
1995. However, all three TSI branches serve the Atlanta trade area, and
combined sales at the other two branches were 10% greater than in 1994.
Although sales of the GMC line of HVACR equipment remain the staple of the TSI
branches, management has continuously worked to expand the breadth of products
sold to customers and, in August 1995, products other than GMC equipment for
the first time represented 40% of total sales. For the six month period ended
August 31, 1995, sales of GMC equipment comprised 69% of total sales, the same
as a year earlier. Greater sales of Janitrol equipment, an identical brand to
the GMC equipment sold by TSI and Valley, also boosted HCS's sales. In the
six month period ended August 31, 1995, HCS's sales of Janitrol equipment
surged over 450% compared to same period of 1994. While maintaining its
strong customer base in the commercial segment of the HVACR industry, HCS has
aggressively marketed Janitrol equipment to the residential homebuilding
market. This market continues to be extremely strong in the Las Vegas area,
which leads the nation in population growth.
- 5 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH AND THREE MONTH PERIODS
ENDED AUGUST 31, 1995 AND AUGUST 31, 1994 (continued)
SIX MONTHS ENDED AUGUST 31, 1995 COMPARED TO 1994 (continued)
The Company's gross margin percentage on sales declined from 20.9% in
1994 to 19.2% in 1995. This follows the trend predicted by the Company and
results from a continual increase in equipment sales, particularly sales of
GMC and Janitrol equipment, as a percentage of consolidated sales. ACRS has
reduced margins both to maintain market share in metropolitan markets where
the company faces intense competitive pressure and to build market share at
branch operations where sales are below expectations. Both TSI and Valley
have succeeded in enhancing sales of parts and supplies, which generally sell
at a higher gross margin than equipment. Thus, TSI has maintained the same
gross margin as the prior year, and Valley has increased its gross margin,
despite participation in equipment distributor rebate programs which resulted
in a lower gross margin on sales of GMC equipment in 1995 than in 1994. As
expected, HCS's successful effort to sell Janitrol equipment in the new
residential market segment has resulted in a significant decline in the
company's gross margin percentage in 1995 compared to 1994.
Net income from energy services increased 140% from 1994 to 1995 because
of both unusually moderate weather during the first quarter of fiscal 1996 and
revenue generated by an installed system from which the Company recognized no
revenue during the first three quarters of fiscal 1995. The Company's
remaining energy service contracts will begin to expire in the third quarter
of fiscal 1996, and will all expire by the end of this fiscal year.
Management is engaged in negotiations to extend certain of the contracts;
however, it is not possible to predict whether such negotiations will
ultimately be successful.
Selling, general and administrative expenses increased 23% from 1994 to
1995, but expressed as a percentage of sales, such expenses declined from
17.2% in 1994 to 16.2% in 1995. Increased expenses include the costs of
opening new branch operations, in addition to certain variable costs that are
proportional to sales volume. Interest expense increased 63% from 1994 to
1995 (from 0.8% to 1.0% of sales), as a result of additional indebtedness
incurred by the Company. See Liquidity and Capital Resources, below.
The Company has estimated its effective tax rate for 1995 based on its
expected alternative minimum tax liability. The Company has approximately $34
million in net operating loss carryforwards and $1,060,000 in tax credit
carryforwards. The Company believes that the best estimate of the expected
benefit to be realized from the future use of such loss and credit
carryforwards is unchanged from the estimate made as of February 28, 1995.
- 6 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH AND THREE MONTH PERIODS
ENDED AUGUST 31, 1995 AND AUGUST 31, 1994 (continued)
THREE MONTHS ENDED AUGUST 31, 1995 COMPARED TO 1994
Much of the preceding analysis with respect to the six-month periods
ended August 31, 1995 and 1994 is applicable to the three-month periods then
ended. Net income increased 10%, from $578,174 in 1994 to $638,079 in 1995.
With sales consisting predominantly 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 33% from 1994 to 1995, with sales at ACRS,
TSI, HCS and Valley increasing 17%, 76%, 27% and 83%, respectively.
Contributing to the increase in TSI's sales compared to 1994 was the severe
flooding in Georgia during July 1994, which hindered new residential
construction considerably. The increase in HCS's sales was notable because
sales in the quarter ended August 31, 1994 had been 60% above the previous
year. HCS's sales in the month of August 1995 exceeded its best previous
month by almost 50%. The record hot weather experienced in the midwestern and
northeastern states during August 1995 had little impact in the Company's
markets, where August temperatures were normal to slightly above normal.
Gross margin percentage in the quarter ended August 31, 1995 was 19%,
compared to 20.7% in 1994. Gross margin percentage has declined for the
reasons stated above, but is generally lowest in the second quarter of the
fiscal year because of a higher proportion of equipment sold than in any other
quarter. In addition, a substantial portion of the increase in HCS's sales
during the quarter consisted of Janitrol equipment, which was sold at low
margins.
Selling, general and administrative expenses increased 23% from 1994 to
1995, consistent with the year-to-date increase. As a percentage of sales,
selling, general and administrative expenses declined from 15.8% in 1994 to
14.7% in 1995. Interest expense increased 65% from 1994 to 1995 because of
additional borrowings used for working capital to support the overall growth
of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $5,817,923 at February 28, 1995 to
$7,848,052 at August 31, 1995, from both current year earnings and funds
raised through borrowings. In March 1995, the Company's revolving line of
credit arrangement with a commercial bank ("Bank") was increased from $3.5
million to $5 million, and the maturity date extended from June 30, 1996 to
February 28, 1997. As of August 31, 1995, the Company had utilized $4.65
million of the
- 7 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
credit line, including letters of credit aggregating $600,000. Additional
borrowings were used to open the two additional branches described above and
for working capital required to sustain the Company's sales growth.
During July 1995, construction of the new warehouse and office of the
Pasadena, Texas branch of ACRS was substantially completed. As of August 31,
1995, the Company had drawn all of the aggregate $432,000 financing
commitment. In accordance with the terms of the loan, in May 1995 the Company
began to repay the loan in monthly installments of $2,400, plus interest.
Higher levels of accounts receivable at August 31, 1995, compared to
such amounts at February 28, 1995, reflect a usual seasonal pattern.
Beginning in August 1995, management emphasized reduction of inventories in
anticipation of slower sales in the last two quarters of the fiscal year.
Including merchandise held on consignment, the Company had approximately 105
days inventory on hand at August 31, 1995.
The Company has entered into a letter of intent to acquire an HVACR
distributor with two branches in southern Georgia. The effective date of the
acquisition will be October 1, 1995, and management expects to close the
transaction during October. Upon consummation of this transaction, Total
Supply will have the franchise to distribute the GMC brand of HVACR equipment
in virtually the entire state of Georgia. The approximately $105,000 required
for the purchase price will come from either the Company's existing cash
balances or its line of credit.
Management is engaged in preliminary discussions with certain lenders,
including the Bank, to increase further the Company's borrowing capacity.
Management believes that the Company's profitability and its base of accounts
receivable and inventory, which is available as collateral, will enable the
Company to borrow additional funds that may be needed to sustain its growth.
However, the Company has no firm financing commitments and there are no
assurances that management's efforts to secure additional financing will
ultimately be successful.
The Company continues to review other business opportunities, including
possible acquisitions. Additional financing would be required in connection
with a sizable acquisition but no arrangements are in place for any such
financing.
The Company has approximately $34 million in tax loss carryforwards and
$1.06 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.
- 8 -
<PAGE>
PART II - OTHER INFORMATION
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) No report on Form 8-K was filed during the quarter ended August 31,
1995.
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 16, 1995 /s/ Anthony R. Maresca
- ----------------------------- -----------------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
- 9 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> AUG-31-1995
<CASH> 377,301
<SECURITIES> 0
<RECEIVABLES> 7,845,662
<ALLOWANCES> 0
<INVENTORY> 7,794,487
<CURRENT-ASSETS> 16,389,683
<PP&E> 1,899,080
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,344,166
<CURRENT-LIABILITIES> 8,541,631
<BONDS> 5,597,093
<COMMON> 102,466
0
0
<OTHER-SE> 6,102,976
<TOTAL-LIABILITY-AND-EQUITY> 20,344,166
<SALES> 29,583,522
<TOTAL-REVENUES> 0
<CGS> 23,892,800
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 298,647
<INCOME-PRETAX> 730,496
<INCOME-TAX> 7,500
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 722,996
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
