<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 May 31, 1996.
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, 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 June 30, 1996 - 10,246,555.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 31, FEBRUARY 29,
1996 1996
----------- ------------
(UNAUDITED)
Current assets:
Cash $ 332,890 $ 348,162
Accounts receivable, net 10,052,804 7,188,839
Inventory 11,189,194 9,934,637
Prepaid expenses and other 146,467 151,027
Deferred income taxes 136,000 136,000
----------- -----------
Total current assets 21,857,355 17,758,665
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Property and equipment, net of
accumulated depreciation 2,536,414 2,110,997
Deferred income taxes 544,000 544,000
Goodwill, net of accumulated amortization 1,458,310 1,470,665
Other assets 340,234 125,959
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$26,736,313 $22,010,286
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----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 760,709 $ 714,810
Accounts payable 10,736,391 8,377,600
Accrued expenses and other liabilities 769,656 548,194
----------- -----------
Total current liabilities 12,266,756 9,640,604
Long-term debt and capital lease
obligations, less current maturities 8,496,008 6,703,470
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Total liabilities 20,762,764 16,344,074
----------- -----------
Shareholders' equity:
Common stock 102,466 102,466
Additional paid-in capital 41,427,020 41,427,020
Accumulated deficit (35,555,937) (35,863,274)
----------- -----------
Total shareholders' equity 5,973,549 5,666,212
----------- -----------
$26,736,313 $22,010,286
----------- -----------
----------- -----------
The accompanying notes are an integral part
of these condensed financial statements.
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
--------------------------
1996 1995
----------- -----------
Sales $18,881,388 $12,093,847
Cost of sales 15,289,616 9,732,205
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Gross profit 3,591,772 2,361,642
Selling, general and administrative expenses (3,280,784) (2,213,867)
Other operating income 165,290 55,878
----------- -----------
Operating income 476,278 203,653
Interest expense (193,378) (132,731)
Other non-operating income 33,672 13,995
----------- -----------
Income before income taxes 316,572 84,917
Provision for income taxes 9,235 -
----------- -----------
Net income $ 307,337 $ 84,917
----------- -----------
----------- -----------
Average outstanding common and equivalent
shares 10,481,382 10,627,935
----------- -----------
----------- -----------
Earnings per share $ .03 $ .01
----------- -----------
----------- -----------
The accompanying notes are an integral part
of these condensed financial statements.
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
-------------------------
1996 1995
----------- -----------
Operating activities:
Net income $ 307,337 $ 84,917
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 159,520 122,114
Increase (decrease) from changes in:
Accounts receivable (2,863,965) (1,985,020)
Inventory (1,254,557) (778,325)
Prepaid expense and other assets (216,510) 156,787
Accounts payable 2,358,791 1,709,445
Accrued expenses and other liabilities 221,462 65,290
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Net cash used in operating activities (1,287,922) (624,792)
----------- -----------
Investing activities:
Acquisition of property and equipment (325,945) (444,259)
Proceeds from disposition of assets 589 525
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Net cash used in investing activities (325,356) (443,734)
----------- -----------
Financing activities:
Proceeds from borrowings 1,900,000 1,530,594
Repayment of debt (301,994) (278,834)
----------- -----------
Net cash provided by financing activities 1,598,006 1,251,760
----------- -----------
Net increase (decrease) in cash and cash
equivalents (15,272) 183,234
Cash at beginning of year 348,162 162,745
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Cash at end of period $ 332,890 $ 345,979
----------- -----------
----------- -----------
Schedule of non-cash investing and
financing activities:
Purchase of equipment under capital
leases (net of cash paid) $ 240,431 $ 134,839
The accompanying notes are an integral part
of these condensed financial statements.
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<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
1995 financial statements have been reclassified to conform to the 1996
presentation. The results of operations for the three month period ended May
31, 1996 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 Georgia,
Las Vegas and Memphis, with payment due only when products are sold. Such
inventory is accounted for as consigned merchandise and is not recorded on
the Company's balance sheet. As of May 31, 1996, the cost of such inventory
held in the bonded warehouses was $10,884,026.
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.
3 - 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.
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<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 THREE MONTH PERIODS ENDED MAY 31,
1996 AND MAY 31, 1995
Net income increased from $84,917 in the quarter ended May 31, 1995
(fiscal 1996) to $307,337 in the quarter ended May 31, 1996 (fiscal 1997), an
increase of 262%. The improved results of operations were generally
attributable to greatly enhanced operating income at ACR Supply, Inc.
("ACRS"), the Company's largest subsidiary, and to revenue received from a
supplier for providing inventory warehousing and delivery services for
another distributor of the supplier. Operating income of ACRS increased 198%
from 1995 to 1996, as management focused on raising sales at existing branch
operations without opening new branches and incurring the attendant startup
expenses.
The Company's enhanced operating results from existing branch operations
enabled the Company to more than offset operating losses incurred in
connection with commencing certain new operations. During the quarter ended
May 31, 1996, the Company added a branch of Valley Supply, Inc. ("VSI") in
Memphis and opened Florida Cooling Supply, Inc. ("FCS"), a new subsidiary
with four branches in central Florida. All five of the new branches became
operational during April 1996. During the quarter ended May 31, 1995, the
Company had opened two additional branch operations. Operating losses,
including start-up costs, of the new branches were approximately $200,000
during the quarter ended May 31, 1996, compared to $50,000 for the same
quarter of 1995. Management anticipates that operating losses will be
incurred at new branches until a customer base is developed, which may take
several months. However, the Company attempts to minimize such losses by
opening branches located in warm climates at the beginning of the cooling
season, when sales of air-conditioning products are significantly greater
than during the autumn and winter months.
Sales increased 56%, to $18,881,388 for the quarter ended May 31, 1996,
compared to $12,093,847 for the quarter ended May 31, 1995. Of 16 branches
open for more than one year at the beginning of the quarter, 13 attained
sales increases above 10%; for the 16 branches, the average sales increase
from 1995 to 1996 was 29%. Sales at Heating & Cooling Supply, Inc. ("HCS"),
the Company's subsidiary in Las Vegas, increased 62% 1995 to 1996, as the
company continued to gain additional business from the sale of the Janitrol
brand of HVACR equipment to the new residential market segment of the HVACR
industry. Sales of Janitrol equipment were 43% of HCS's total sales in the
quarter ended May 31, 1996, compared to 22% in 1995, and comprised 75% of the
total sales growth from 1995 to 1996. Sales at ACRS were favorably affected
by record high temperatures in Texas during the month of May 1996.
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<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 THREE MONTH PERIODS ENDED MAY 31,
1996 AND MAY 31, 1995 (CONTINUED)
The Company's gross margin percentage on sales was 19.0% for the quarter
ended May 31, 1996, compared to 19.5% in 1995, but reversed the trend of
declining quarterly gross margin percentage for the prior two years. The
19.0% quarterly gross margin percentage was the highest since the same
quarter of 1995, and resulted from both an improvement in margin percentage
at ACRS and the margin percentage attained by Ener-Tech Industries ("ETI"), a
subsidiary acquired by the Company in January 1996. A renewed effort by
management to reduce net product costs resulted in an increase in gross
margin percentage at ACRS. ETI specializes in the sale of controls and
engineered control systems used in commercial facilities, and obtains a
higher gross margin percentage for its value-added engineering and assembly
processes than the Company's other subsidiaries.
Selling, general and administrative expenses ("SG&A") increased 48% in
the quarter ended May 31, 1996 compared to the same quarter of 1995, because
of the costs associated with the additional branch operations described
above. Expressed as a percentage of sales, SG&A expenses declined from 18.3%
in 1995 to 17.4% in 1996. Without the costs of opening new branches, the
ratio of SG&A expenses to sales improved significantly at both ACRS and HCS.
Beginning in the quarter ended May 31, 1996, the Company earned revenue
from a supplier by providing warehousing and shipping services to another
distributor of the supplier. Such revenue comprises most of the net other
operating income reflected in the statement of operations. The Company
expects to continue this arrangement at least through December 1996. Net
other operating income also includes energy services income which declined
from 1995 because of the expiration of the Company's contracts with users.
The Company now provides services on a month-to-month basis to a single
customer with twelve facilities. Management cannot estimate how long such an
informal arrangement may continue.
Interest expense increased 46% from 1995 to 1996, but declined from 1.1%
to 1.0% of sales. Although the Company has incurred substantial additional
indebtedness, it has benefitted from an interest rate reduction negotiated in
connection with the most recent increase in its line of credit. See
Liquidity and Capital Resources, below.
The Company incurs minimal income tax expense because of its substantial
net operating loss carryforwards. Income tax expense also includes a
provision for certain state income taxes. See Liquidity and Capital
Resources, below.
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $8,118,000 at February 29, 1996 to
$9,591,000 at May 31, 1996, as a result of the Company's increased
operations. Current assets increased 23% from February 29 to May 31, 1996,
principally in accounts receivable and inventory. A substantial majority of
the increase in inventory was used to stock new branch operations and has
been financed with additional trade credit. The increase in accounts
receivable is attributable to the growth in the Company's sales and has been
largely financed through long-term borrowings. Gross receivables represented
39 days of sales at May 31, 1996, compared to 49 days of sales at February
29, 1996, reflecting a normal seasonal trend.
At May 31, 1996, the Company's outstanding borrowings under its bank
line of credit were $6.8 million, compared to $4.9 million at February 29,
1996. In June 1996, the Company borrowed the remaining available $600,000
under its credit line. Management does not believe that the Company will
have further requirements for financing from outside sources during the
current fiscal year because of the cash flow expected to be generated from
operations during the second and third quarters of the year.
The Company continually examines other business opportunities, including
acquisitions, within the HVACR industry. However, management does not plan
to actively seek a sizable acquisition or to open additional branch
operations during the current fiscal year, but rather to concentrate on
developing FCS. Management believes that Florida, the third largest state in
terms of installed air conditioning systems, represents a significant
opportunity for future expansion.
The Company has approximately $34 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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<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 May 31, 1996.
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, 1996 /s/ Anthony R. Maresca
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Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 332,890
<SECURITIES> 0
<RECEIVABLES> 10,603,808
<ALLOWANCES> 551,004
<INVENTORY> 11,189,194
<CURRENT-ASSETS> 21,857,355
<PP&E> 4,135,825
<DEPRECIATION> 1,599,411
<TOTAL-ASSETS> 26,736,313
<CURRENT-LIABILITIES> 12,266,756
<BONDS> 0
0
0
<COMMON> 102,466
<OTHER-SE> 5,871,083
<TOTAL-LIABILITY-AND-EQUITY> 26,736,313
<SALES> 18,881,388
<TOTAL-REVENUES> 0
<CGS> 15,289,616
<TOTAL-COSTS> 15,289,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,378
<INCOME-PRETAX> 316,572
<INCOME-TAX> 9,235
<INCOME-CONTINUING> 307,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 307,337
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
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