<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, 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.
- -----------------------------------------------------------------------------
(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 September 30, 1996 - 10,371,555.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, February 29,
1996 1996
----------- -------------
(Unaudited)
Current assets:
Cash $ 218,467 $ 348,162
Accounts receivable, net 10,331,477 7,188,839
Inventory 11,930,934 9,934,637
Prepaid expenses and other 122,901 151,027
Deferred income taxes 136,000 136,000
----------- -----------
Total current assets 22,739,779 17,758,665
----------- -----------
Property and equipment, net of
accumulated depreciation 2,521,377 2,110,997
Deferred income taxes 544,000 544,000
Goodwill, net of accumulated amortization 1,445,956 1,470,665
Other assets 335,333 125,959
----------- -----------
$27,586,445 $22,010,286
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 793,556 $ 714,810
Accounts payable 9,704,994 8,377,600
Accrued expenses and other liabilities 1,136,815 548,194
----------- -----------
Total current liabilities 11,635,365 9,640,604
Long-term debt and capital lease
obligations, less current maturities 9,074,953 6,703,470
----------- -----------
Total liabilities 20,710,318 16,344,074
----------- -----------
Shareholders' equity:
Common stock 103,716 102,466
Additional paid-in capital 41,550,770 41,427,020
Accumulated deficit (34,778,359) (35,863,274)
----------- -----------
Total shareholders' equity 6,876,127 5,666,212
----------- -----------
$27,586,445 $22,010,286
----------- -----------
----------- -----------
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)
Six months ended Three months ended
August 31, August 31,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Sales $44,029,682 $29,583,522 $25,148,294 $17,489,675
Cost of sales 35,540,071 23,892,800 20,250,455 14,160,595
----------- ----------- ----------- -----------
Gross profit 8,489,611 5,690,722 4,897,839 3,329,080
Selling, general and
administrative expenses (7,261,992) (4,784,364) (3,981,208) (2,570,497)
Other operating income 257,159 89,137 91,869 33,259
----------- ----------- ----------- -----------
Operating income 1,484,778 995,495 1,008,500 791,842
Interest expense (440,060) (298,647) (246,682) (165,916)
Other non-operating
income 72,037 33,648 38,365 19,653
----------- ----------- ----------- -----------
Income before taxes 1,116,755 730,496 800,183 645,579
Provision for
income taxes (31,840) (7,500) (22,605) (7,500)
----------- ----------- ----------- -----------
Net income $ 1,084,915 $ 722,996 $ 777,578 $ 638,079
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average outstanding
common and equivalent
shares 10,600,841 10,587,252 10,713,751 10,558,958
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share $ .10 $ .07 $ .07 $ .06
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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)
Six months ended
August 31,
------------------------
1996 1995
----------- -----------
Operating activities:
Net income $ 1,084,915 $ 722,996
Adjustments to reconcile net income to net
cash (used in) operating activities:
Depreciation and amortization 331,756 254,859
Compensation from stock grant 125,000
Increase (decrease) from changes in:
Accounts receivable (3,142,638) (3,125,383)
Inventory (1,996,297) 559,024
Prepaid expense and other assets (181,248) 166,890
Accounts payable 1,327,394 385,594
Accrued expenses and other liabilities 588,621 235,306
----------- -----------
Net cash used in operating activities (1,862,497) (800,714)
----------- -----------
Net cash used in investing activities:
Acquisition of property and equipment (386,078) (641,336)
----------- -----------
Financing activities:
Proceeds from borrowings 2,571,862 2,057,608
Repayment of debt (452,982) (401,002)
----------- -----------
Net cash provided by financing activities 2,118,880 1,656,606
----------- -----------
Net increase (decrease) in cash (129,695) 214,556
Cash at beginning of year 348,162 162,745
----------- -----------
Cash at end of period $ 218,467 $ 377,301
----------- -----------
----------- -----------
Schedule of non-cash investing and
financing activities:
Purchase of equipment under capital leases
(net of cash paid) $ 331,349 $ 211,920
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 1995
financial statements have been reclassified to conform to the 1996 presentation.
The results of operations for the three and six-month periods ended August 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 August 31, 1996, the cost of such inventory held in the
bonded warehouses was $10,216,473.
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 of alternative minimum federal
income taxes and state income taxes. Federal income taxes on taxable income are
substantially offset by the benefit of the Company's net operating loss and tax
credit carryforwards.
-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, 1996 AND AUGUST 31, 1995
SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO 1995
Net income increased to $1,084,915 for the six months ended August 31, 1996
(fiscal 1997), compared to $722,996 for the six months ended August 31, 1995
(fiscal 1996), an increase of 50% The improved results of operations were
generally attributable to increased operating income at ACR Supply, Inc.
("ACRS") and at Heating and Cooling Supply, Inc. ("HCS"), both of which reflect
fiscal 1997 earnings that were more than double the earnings of each company for
the first six months of fiscal 1996. The Company's enhanced operating results
from existing branch operations enabled the Company to more than offset
operating losses in connection with the five branch operations opened during the
first quarter of fiscal 1997. Such losses, which were approximately $280,000
during the six month period ended August 31, 1996, are expected by the Company
during the initial months after opening a branch, but have been exacerbated
during fiscal 1997 by lower than expected sales at Florida Cooling Supply, Inc.
("FCS") which was opened in April 1996. During the same period of fiscal 1996,
the Company opened two new branch operations which did not experience an
aggregate operating loss.
Consolidated sales increased 49% from fiscal 1996 to 1997. Sales at
branches opened or acquired after the second quarter of fiscal 1996 accounted
for 47% of this increase. Of 16 branches that had been open more than a year at
the beginning of fiscal 1996, 15 experienced a gain in sales for the first six
months of fiscal 1997, with the average increase equal to 17%. Sales at HCS
increased 54% from fiscal 1996 to 1997, as construction spending in the Las
Vegas area continued unabated. Sales at ACRS increased 25% from fiscal 1996 to
1997 although there were no additional branches of ACRS opened in fiscal 1997.
The Company's gross margin percentage on sales increased from 19.2% in
fiscal 1996 to 19.3% in fiscal 1997, the first comparative increase in margin
percentage in three years. The gross margin percentage attained by Ener-Tech
Industries, Inc. ("ETI"), which was acquired in January 1996, and by Florida
Cooling Supply, Inc. ("FCS"), which was started in fiscal 1997, exceed the
Company's average and offset the comparatively lower gross margin percentage
experienced at HCS, Total Supply, Inc. ("TSI") and Valley Supply, Inc. ("VSI"),
each of which have a large volume of low-margin equipment in its sales mix. In
addition, the gross margin percentage at ACRS has increased during fiscal 1997
as a result of management's effort to reduce net product costs.
-5-
<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, 1996 AND AUGUST 31, 1995 (continued)
SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO 1995 (continued)
Selling, general and administrative ("SG&A") expenses increased 52% from
fiscal 1996 to 1997, and, expressed as a percentage of sales, such expenses
increased from 16.2% in fiscal 1996 to 16.5% in fiscal 1997. The increase in
SG&A expenses as a percentage of sales is attributable to a non-recurring charge
of $125,000 recorded in the second quarter of fiscal 1997 for performance-based
compensation pursuant to an employment contract. Generally, the Company expects
SG&A expenses to decline as a percentage of sales as the volume of sales
increases. However, in fiscal 1997, SG&A expenses as a percentage of sales at
ETI and FCS have been high because of lower than expected sales. Management
believes that if sales at ETI and FCS reach expected levels, SG&A expenses as a
percentage of sales will decline as anticipated.
Beginning in fiscal 1997, the Company has earned revenue from a supplier by
providing warehousing and shipping services to another distributor of the
supplier. Such revenue comprises the majority of 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 has declined slightly in fiscal 1997 from
fiscal 1996. Although all of the Company's energy services contracts have
expired, the Company continues to provide 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 47% from fiscal 1996 to fiscal 1997 but remained
unchanged at 1.0% of sales. The higher level of interest expense has resulted
from greater borrowings necessary to provide the working capital to support the
Company's sales growth rate.
The provision for income taxes consists of alternative minimum federal
income taxes and state income taxes. Federal income taxes on taxable income are
substantially offset by the benefit of the Company's net operating loss and tax
credit carryforwards. See Liquidity and Capital Resources, below.
Management is engaged in various initiatives designed to increase sales at
both ETI and FCS. The Company has opened a branch of ETI in Memphis, where it
is located in the same facility as a branch of VSI, which is based in Memphis.
Management believes that many of VSI's customers will also purchase the products
distributed by ETI, which generally consist of building controls and control
systems. Conversely, management also believes that customers that seek to
purchase certain building controls that are distributed exclusively by ETI will
also purchase other heating and air conditioning products sold by VSI.
-6-
<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, 1996 AND AUGUST 31, 1995 (continued)
SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO 1995 (continued)
Management is aggressively seeking to obtain the distribution rights for a line
of HVAC equipment to be sold at FCS. Presently, FCS sells almost no HVAC
equipment, which deters sales to customers who wish to purchase all of their
requirements from a single HVAC distributor.
THREE MONTHS ENDED AUGUST 31, 1996 COMPARED TO 1995
Much of the preceding analysis with respect to the six-month periods ended
August 31, 1996 and 1995 is applicable to the three-month periods then ended.
Net income increased 22%, from $638,079 in 1995 to $777,578 in 1996. The
operating losses experienced at the branches opened in the first quarter of
fiscal 1997 declined significantly in the second quarter. With its 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 44% from 1995 to 1996, with sales at ACRS,
TSI, HCS and VSI increasing 22%, 56%, 48% and 31%, respectively. Sales at HCS
reached record levels each succeeding month during the quarter. Contributing to
the increase in TSI's and VSI's sales compared to 1995 are new branch operations
that have been opened since the second quarter of fiscal 1996.
Gross margin percentage in the quarter ended August 31, 1996 was 19.5%,
compared to 19.0% in 1995. Notably, the Company's gross margin percentage was
greater in the second quarter of fiscal 1997 than in the first quarter.
Customarily, the gross margin percentage is lowest in the second quarter of the
fiscal year because of a higher proportion of equipment sold than in any other
quarter. This unusual circumstance supports management's belief that its
efforts to reverse the downward trend of the Company's gross margin percentage
have been successful.
For the reasons stated above, SG&A expenses as a percentage of sales
increased from 14.7% in 1995 to 16.2% in 1996. Interest expense as a percentage
of sales was essentially unchanged from 1995 to 1996.
-7-
<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 $5,817,923 at February 29, 1996 to
$11,104,414 at August 31, 1996, as a result of the Company's increased
operations. At August 31, 1996, current assets were 28% greater than at
February 29, reflecting expected seasonal trends. Gross receivables represented
40 days of sales at August 31, 1996, compared to 49 days at February 29, also
reflecting the usual seasonal adjustment.
At August 31, 1996, the Company had fully utilized the borrowings available
under its bank line of credit. The Company's outstanding borrowings under its
credit line were $7.4 million at August 31, compared to $4.9 million at February
29, 1996. Management does not believe that the lack of borrowing capacity under
its bank line of credit will impair the Company's existing operations because
the Company generates significant cash flow during the third quarter of its
fiscal year as the level of sales and inventory purchases decline from the peak
levels experienced during the first and second quarters of the fiscal year.
Management may, however, consider securing an increase in its credit line in
order to take advantage of opportunities for expansion that may arise in late
1996.
In October 1996, the Company entered into an agreement pursuant to which
St. James Capital Partners, L.P. ("St. James"), based in Houston, will make
available to the Company up to $5 million that may be used in connection with
acquisitions by the Company. Under the terms of the agreement, St. James may
also provide other investment banking services to the Company in connection with
specific acquisition opportunities. Although the Company continually considers
other business opportunities, prior to this arrangement, management had not
planned to actively seek any sizable acquisitions during the remainder of fiscal
1997. In light of the available acquisition financing, management intends to
renew its efforts to identify suitable acquisitions.
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.
-8-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. - RESULTS OF VOTES OF SECURITY HOLDERS
At the Annual Meeting of Shareholders on August 22, 1996, the shareholders
of the Company voted on and approved the following issues.
Issue 1 - Election of Directors for a term of one year expiring at the
next Annual Meeting of Shareholders:
Shares Shares
For Withheld
--------- --------
Thomas W. Courtney 8,130,232 117,545
Anthony R. Maresca 8,239,317 8,460
Ronald T. Nixon 8,239,317 8,460
Herbert E. Stansbury, Jr. 8,239,017 8,760
Alex Trevino, Jr. 8,239,317 8,460
Issue 2 - Approval of 1996 Stock Option Plan
Shares For 7,968,357
Shares Against 72,321
Shares Abstain 12,365
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended August 31, 1996.
-9-
<PAGE>
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, 1996 /s/ ANTHONY R. MARESCA
- ------------------------ -------------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 218,467
<SECURITIES> 0
<RECEIVABLES> 10,997,641
<ALLOWANCES> 666,164
<INVENTORY> 11,930,934
<CURRENT-ASSETS> 22,739,779
<PP&E> 4,138,211
<DEPRECIATION> 1,616,834
<TOTAL-ASSETS> 27,586,445
<CURRENT-LIABILITIES> 11,635,365
<BONDS> 0
0
0
<COMMON> 103,716
<OTHER-SE> 6,772,411
<TOTAL-LIABILITY-AND-EQUITY> 27,586,445
<SALES> 44,029,682
<TOTAL-REVENUES> 0
<CGS> 35,540,071
<TOTAL-COSTS> 35,540,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 440,060
<INCOME-PRETAX> 1,116,755
<INCOME-TAX> 31,840
<INCOME-CONTINUING> 1,084,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,084,915
<EPS-PRIMARY> .11
<EPS-DILUTED> .10
</TABLE>
