<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 November 30, 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) 780-8532
(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 December 31, 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>
NOVEMBER 30, FEBRUARY 28,
1995 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ 369,795 $ 162,745
Accounts receivable, net 6,984,251 4,720,279
Inventory 7,796,461 8,353,511
Prepaid expenses and other 228,761 366,888
Deferred income taxes 136,000 136,000
------------ ------------
Total current assets 15,515,268 13,739,423
------------ ------------
Property and equipment, net of accumulated
depreciation 1,985,508 1,268,771
Deferred income taxes 544,000 544,000
Goodwill, net of accumulated amortization 1,452,584 1,384,933
Other assets 130,066 194,617
------------ ------------
$ 19,627,426 $ 17,131,744
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 727,816 $ 686,447
Accounts payable 6,223,364 6,738,283
Accrued expenses and other liabilities 711,621 496,770
------------ ------------
Total current liabilities 7,662,801 7,921,500
Long-term debt, less current maturities 5,839,713 3,727,798
------------ ------------
Total liabilities 13,502,514 11,649,298
------------ ------------
Shareholders' equity:
Common stock 102,466 102,466
Additional paid-in capital 41,427,020 41,427,020
Accumulated deficit (35,404,574) (36,047,040)
------------ ------------
Total shareholders' equity 6,124,912 5,482,446
------------ ------------
$ 19,627,426 $ 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>
NINE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $43,540,915 $32,648,383 $13,957,393 $10,040,514
Cost of sales 35,290,889 25,933,813 11,398,089 8,044,445
----------- ----------- ----------- -----------
Gross profit 8,250,026 6,714,570 2,559,304 1,996,069
Selling, general and
administrative expenses (7,279,767) (5,781,351) (2,495,403) (1,898,922)
Income from energy services,
net 111,649 76,913 22,512 39,716
----------- ----------- ----------- -----------
Operating income 1,081,908 1,010,132 86,413 136,863
Interest expense (476,075) (311,821) (177,428) (128,349)
Other non-operating income 52,565 53,070 18,917 28,293
----------- ----------- ----------- -----------
Income (loss) before taxes 658,398 751,381 (72,098) 36,807
Provision for income taxes (15,932) (2,000) (8,432) (1,000)
----------- ----------- ----------- -----------
Net income (loss) $ 642,466 $ 749,381 $ (80,530) $ 35,807
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average outstanding common
and equivalent shares 10,573,296 10,626,076 10,529,069 10,651,798
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per share $ .06 $ .07 $ (.01) $ .00
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
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)
NINE MONTHS ENDED
NOVEMBER 30,
------------------------
1995 1994
---------- ----------
Operating activities:
Net income $ 642,466 $ 749,381
Adjustments to reconcile net income
to net cash (used in) operating
activities:
Depreciation and amortization 393,636 327,571
Increase (decrease) from changes in:
Accounts receivable (2,022,239) (1,077,967)
Inventory 729,669 (2,193,172)
Prepaid expense and other assets 216,076 123,197
Accounts payable (891,087) 704,149
Accrued expenses and other liabilities 193,799 135,526
----------- -----------
Net cash used in operating activities (737,680) (1,231,315)
----------- -----------
Investing activities:
Acquisition of property and equipment, net (759,968) (365,251)
Payments to seller and for acquisition costs
in excess of cash acquired (35,000)
----------- -----------
Net cash used in investing activities (794,968) (365,251)
----------- -----------
Financing activities:
Proceeds from borrowings 2,445,019 2,570,051
Repayment of debt (705,321) (538,859)
----------- -----------
Net cash provided by financing activities 1,739,698 2,031,192
----------- -----------
Net increase in cash and cash equivalents 207,050 434,626
Cash at beginning of year 162,745 50,279
----------- -----------
Cash at end of period $ 369,795 $ 484,905
----------- -----------
----------- -----------
Schedule of non-cash investing and
financing activities:
Purchase of equipment under capital
leases (net of cash paid) $ 228,255 $ 86,959
Acquisition of subsidiary:
Liabilities in excess of assets acquired 31,436
Goodwill 96,437
Note payable to seller 30,000
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 1994
financial statements have been reclassified to conform to the 1995 presentation.
The results of operations for the three and nine-month periods ended November
30, 1995 are not necessarily indicative of the results to be expected for the
full year.
All inventories represent finished goods held for sale.
2 - ACQUISITION
In October 1995, the Company purchased all of the outstanding capital stock
of an HVACR wholesale distributor located in south Georgia. At closing, the
Company paid $75,000 cash and issued a note for $30,000 to the seller. The note
bears interest at 9% per annum and is payable in full, with accrued interest, on
September 30, 1996.
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, 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, 1995, the cost of such inventory held in the
bonded warehouses was $7,662,076.
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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 NINE-MONTH AND THREE-MONTH PERIODS
ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994
NINE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO 1994
For the nine-month period ended November 30, 1995 (fiscal 1996), net income
decreased to $642,866, or 14%, compared to $749,381 for the nine months ended
November 30, 1994. Despite significantly greater sales volume, lower gross
margins, expenses associated with opening additional branch operations and
higher interest costs resulted in the decline in net income. As reported
previously, management has successfully focused on increasing the market shares
of each of its operating companies and structuring these companies to facilitate
a continued high growth rate. During fiscal 1996, the Company has opened three
additional branches and acquired two other branches, bringing the total number
of branch operations to 21.
Consolidated sales increased 33% from 1994 to 1995. Increased sales at
Valley Supply ("Valley"), which opened in May 1994, represented 14% of the
increase in 1995. Sales at ACR Supply ("ACRS"), Total Supply ("TSI") and
Heating & Cooling Supply ("HCS") increased 19%, 65% and 33%, respectively, from
1994 to 1995. Excluding sales at its McAllen, Texas branch, which opened in May
1995, ACR's sales increased 16% from 1994 to 1995, as all but three branches
attained sales increases above 5%. Sales at the two branches of TSI open more
than one year have increased 9% in 1995 compared to 1994; the remaining increase
is attributable to both the opening of the Forest Park branch in April 1995 and
the acquisition of two branches in south Georgia in October 1995. Sales at HCS
continued to surge largely because of increased sales of its Janitrol brand of
HVACR equipment in the residential new construction market.
The Company's gross margin percentage on sales declined from 20.6% in 1995
to 18.9% in 1995, a continuing trend resulting from the fact that an increasing
percentage of consolidated sales are generated at TSI, VSI and HCS, which all
sell the GMC and Janitrol brands of HVACR equipment. In 1995, sales at these
three subsidiaries represented 44% of consolidated sales compared to 37% in
1994. Sales at the recently-acquired south Georgia branches of TSI presently
consist of 90% GMC equipment and only 10% parts and supplies, compared to 35%
parts and supplies at the other TSI branches. By spring 1996, these two
branches will be stocked with the same parts and supplies as other TSI branches.
As reported in earlier quarters in fiscal 1996, ACRS has reduced its margins
both to maintain market share in metropolitan markets where there is intense
competitive pressure and to build market share at new branches and branches
where sales are below management's expectations. At HCS, the increase in
equipment sales to the residential new construction market has resulted in a
significant decline in the company's gross margin percentage in 1995 compared to
1994.
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<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 NINE-MONTH AND THREE-MONTH PERIODS
ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994 (continued)
NINE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO 1994 (continued)
Net income from energy services increased 45% from 1994 to 1995 because of
revenue generated by an installed system from which the Company recognized no
revenue during the first three quarters of fiscal 1995. Pursuant to their
terms, all of the Company's energy service contracts would expire in the fourth
quarter of fiscal 1996. However, the Company's customers have informed
management of their desire to extend the contracts on a short-term basis.
Accordingly, management believes that the Company will realize energy service
revenues at least through the first quarter of fiscal 1997.
Selling, general and administrative expenses increased 26% from 1994 to
1995, but expressed as a percentage of sales, such expenses declined from 17.7%
in 1994 to 16.7% in 1995. Increased expenses include the costs of opening new
branch operations, in addition to certain variable costs such as sales
commissions and delivery expense that are proportional to sales volume.
Interest expense increased 53% from 1994 to 1995 (from 1.0% to 1.1% of sales),
as a result of additional indebtedness incurred by the Company. See Liquidity
and Capital Resources, below.
Provision for income taxes includes both federal and state income taxes.
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 $1.06 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. 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.
THREE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO 1994
Much of the preceding analysis with respect to the nine-month periods ended
November 30, 1995 and 1994 is applicable to the three-month periods then ended.
For the three months ended November 30, 1995, the Company had a net loss of
$(80,530) compared to net income of $35,807 for the three months ended November
30, 1994. The decline in net income for the quarter was a result of the same
factors that caused net income to decline for the nine-month period ended
November 30, 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 NINE-MONTH AND THREE-MONTH PERIODS
ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994 (continued)
THREE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO 1994 (continued)
Consolidated sales increased 39% from 1994 to 1995, with sales at ACRS,
TSI, HCS and Valley increasing 19%, 92%, 59% and 18%, respectively. Excluding
the effect of the south Georgia branches acquired in October 1995, TSI's sales
would have increased 61%. HCS attained its greatest ever quarterly sales,
bolstered by sales of Janitrol equipment that represented 40% of total sales.
Gross margin percentage in the quarter ended November 30, 1995 declined to
18.3%, compared to 19.9% in 1994, for the reasons stated above.
Selling, general and administrative expenses increased 31% from 1994 to
1995, slightly exceeding the rate of increase for the nine-month period, because
of the greater percentage increase in sales for the quarter, expenses associated
with the acquired south Georgia branches and expenses incurred in preparing to
open a north Georgia branch of TSI. As a percentage of sales, selling, general
and administrative expenses declined from 18.9% in 1994 to 17.9% in 1995.
Interest expense increased 38% from 1994 to 1995 because of additional
borrowings used for working capital to support the overall growth of the
Company.
With sales consisting predominantly of air conditioning products because of
the Company's 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 is the most profitable and has the
greatest sales volume; the fourth quarter is the least profitable and has the
lowest sales volume.
TSI's acquisition of Sweet Georgia Air Supply, Inc. in October 1995 not
only added two branch operations to TSI, but more significantly, gave TSI the
distribution rights for the GMC brand of HVACR equipment in the area of Georgia
south of Atlanta, so that TSI now has the GMC distribution franchise for
virtually the entire state of Georgia. Management believes that this area may
potentially support up to four additional branches. As stated above, the two
acquired branches presently sell HVACR equipment almost exclusively, and
management intends to augment the inventory at these branches with the parts and
supplies sold by other TSI branches as quickly as possible. With the addition
of a full line of parts and supplies to their inventory, the gross margin
percentage at these branches should also increase to that of the other TSI
branches.
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<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 NINE-MONTH AND THREE-MONTH PERIODS
ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994 (continued)
THREE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO 1994 (continued)
The Company has entered into a letter of intent to acquire a company based
in Tennessee ("ETI"), which designs and assembles control panels for commercial
buildings and also distributes commercial controls parts and supplies to
industrial and institutional users and other HVACR distributors. ETI has
exclusive franchises to distribute various Honeywell product lines in Tennessee
and certain surrounding areas. ETI's primary business is more technically
demanding than that of the Company's other operations and, accordingly, ETI
realizes a higher gross margin percentage on its sales, which will slightly
exceed $2 million during calendar 1995. Management plans to provide additional
financing to ETI in order to more fully capitalize on its exclusive franchises
and expects to utilize some of the ETI's technical capability to develop
opportunities at its other operations. In addition, the Company may add other
HVACR products to ETI's inventory in order to broaden the range of products that
ETI can sell to its customer base. Management expects to complete the
acquisition of ETI in the fourth quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $3,337,941 at February 28, 1995 to
$7,852,467 at November 30, 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 November 30, 1995, the Company had used $4.9 million
of its credit line, including issuing letters of credit aggregating $600,000.
During fiscal 1996, the Company also fully utilized financing of $432,000
provided by the Bank for the construction of a new warehouse and office for the
Pasadena, Texas branch of ACRS. In accordance with the terms of the loan, the
Company began in May 1995 to repay the loan in monthly installments of $2,400,
plus interest.
Higher levels of accounts receivable at November 30, 1995, compared to such
amounts at February 28, 1995, reflect a usual seasonal pattern. Excluding
merchandise held on consignment, the Company had approximately 100 days
inventory on hand at November 30, 1995.
- 8 -
<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)
Management estimates that the purchase price of the contemplated
acquisition of ETI, as described above, will be approximately $260,000,
depending on ETI's shareholders' equity as of December 31, 1995, and certain
other factors relating to ETI's accounts receivable and inventory. 80% of the
purchase price will be financed by the selling shareholders, to be repaid over
four years. The cash required to consummate the acquisition will come from the
Company's existing cash balances.
Management has received preliminary proposals from prospective lenders,
including the Bank, to increase the Company's current borrowing capacity by 30%
to 60%, based upon the existence of accounts receivable and inventory as
collateral for such borrowings. Management believes that a firm commitment for
additional financing will be concluded during the fourth quarter of fiscal 1996,
and that such financing will be adequate to sustain the Company's present growth
rate through fiscal 1997. However, there are no assurances that management's
efforts to secure additional financing will ultimately be successful or that,
even if additional financing is obtained, the Company will be able to maintain
its present growth rate.
- 9 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27: Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter ended November 30, 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.
January 16, 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> 9-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> NOV-30-1995
<CASH> 369,795
<SECURITIES> 0
<RECEIVABLES> 6,984,251
<ALLOWANCES> 0
<INVENTORY> 7,796,461
<CURRENT-ASSETS> 15,515,268
<PP&E> 1,985,508
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,627,426
<CURRENT-LIABILITIES> 7,662,801
<BONDS> 5,839,713
0
0
<COMMON> 102,466
<OTHER-SE> 6,022,446
<TOTAL-LIABILITY-AND-EQUITY> 19,627,426
<SALES> 43,540,715
<TOTAL-REVENUES> 0
<CGS> 35,290,889
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 476,075
<INCOME-PRETAX> 658,398
<INCOME-TAX> 15,392
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 642,466
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
