<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
February 29, 1996 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)
Registrant's telephone number, including area code: (713) 780-8532
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
<PAGE>
The aggregate market value of the common stock held by nonaffiliates of the
registrant on April 30, 1996 was $5,054,708. The aggregate market value was
computed by reference to the last trading price as reported on the National
Association of Securities Dealers Automated Quotation System. For the purposes
of this response, Executive Officers, Directors and holders of more than 10% of
the Registrant's common stock are considered affiliates of the registrant.
The number of shares outstanding of the registrant's common stock as of
April 30, 1996: 10,246,555 shares
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in August 1996 is incorporated by reference in answer to
Part III of this report.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of
Security-Holders 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Item 8. Financial Statements and Supplementary
Data 18
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 36
PART III
Item 10. Directors and Executive Officers of the
Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial
Owners and Management 36
Item 13. Certain Relationships and Related
Transactions 36
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 37
- 3 -
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
ACR Group, Inc. (which, together with its subsidiaries is herein referred
to as the "Company" or "ACRG") is a Texas corporation based in Houston. In
1990, the Company began to acquire and operate businesses engaged in the
wholesale distribution of heating, ventilating, air conditioning and
refrigeration ("HVACR") equipment and supplies. The Company acquired its first
operating company in 1990. Since 1990, ACRG has acquired or started up five
other HVACR distribution companies and now has 27 branch operations in five
states. The Company plans to continue expanding in the Sunbelt of the United
States, both through acquisitions and business startups.
THE HVACR INDUSTRY
The Company's interest in the HVACR distribution industry is a direct
result of the business experience of its Chairman and President, Alex Trevino,
Jr., who has been associated with the industry for over thirty years in varying
capacities, first as owner of his own distribution company and then as president
of various successor companies following the sale of his business.
The Company sells supplies and equipment to installing contractors and
dealers and to other technically trained customers responsible for the
installation, repair and maintenance of HVACR systems. Maintenance of a large
and diverse inventory base is an important element in the Company's sales.
The HVACR supply industry is segmented into discrete categories. First, it
serves both commercial and residential HVACR businesses. Each of these segments
is further divided into two markets - new construction sales and replacement
and/or repair sales. Some companies choose to specialize in serving the new
construction markets while others focus on the repair/replacement market,
commonly referred to as the "aftermarket." ACRG is not oriented toward any
particular segment but instead concentrates on acquiring and developing
profitable businesses in the Sunbelt region of the United States which have a
significant market share within their segment of the HVACR distribution
industry. The Company believes that its growth strategy is appropriate in view
of the competitive nature of the HVACR industry and the continuing consolidation
in that industry, discussed below.
There are many manufacturers of products used in the HVACR industry, and no
single manufacturer dominates the market for a range of products. Some
manufacturers limit the number and territory of wholesalers that may distribute
their products, but
- 4 -
<PAGE>
exclusivity is rare. Many manufacturers will generally permit any distributor
who satisfies customary commercial credit standards to sell their products. In
addition, there are some manufacturers, primarily of equipment, that distribute
their own products through factory branches. The widespread availability of
HVACR products to distributors results in significant competition. There are
several thousand HVACR wholesale distributors in the United States, and there is
no single company or group of companies that dominates the HVACR distribution
industry. The industry traditionally has been characterized by closely-held
businesses with operations limited to local or regional geographic areas;
however, a process of consolidation in this industry is ongoing, as many of
these companies reach maturity and face strategic business issues such as
ownership succession, changing markets and lack of capital to finance growth.
Management's goal is to attract the present owners and management of such
businesses by offering certain advantages related to economies of scale: lower
cost of products from volume purchasing, new product lines, and financial,
administrative and technical support.
The Company believes that investing in the HVACR distribution industry has
fewer economic risks than many other industries. Although the HVACR industry is
affected by general economic conditions such as cycles in new home construction,
sales of replacement equipment and repair parts for the existing base of
installed air conditioning and heating systems provides a cushion against
economic swings. The aftermarket is far less susceptible to changes in economic
conditions than the new construction market and now represents approximately 65%
of all units installed annually. This percentage should continue to increase as
the base of installed systems expands. Much of the HVACR industry is also
seasonal; sales of air conditioning and heating systems are generally largest
during the times of the year when climatic conditions require the greatest use
of such systems. Sales of refrigeration systems, which are generally to
commercial customers, are subject to less seasonality.
Investments in HVACR Distribution Companies:
ACR SUPPLY, INC.
The Company acquired ACR Supply, Inc. ("ACRS") effective February 28, 1993,
after providing ACRS management services, loans and guarantees from 1991.
ACRS now has twelve branches in Texas and one in Louisiana. Most of ACRS's
branches have attained market share leadership in their respective areas.
In major metropolitan areas such as San Antonio and Houston, ACRS
encounters significantly more competition than in smaller cities. However,
through aggressive sales efforts, the Houston branches have achieved a
significant, but not dominant, share of their local HVACR markets. The San
Antonio branch, which opened in April 1993, and the McAllen, Texas branch,
which opened in 1995, have not attained a significant market share.
- 5 -
<PAGE>
ACRS sells primarily to licensed contractors serving the residential and
light commercial (restaurants, strip shopping centers, etc.) markets. The
company's sales mix is approximately 34% equipment and 66% parts and
supplies, with the equipment and parts generally directed to the
aftermarket and the supplies used principally in new construction.
HEATING AND COOLING SUPPLY, INC.
The Company acquired Heating and Cooling Supply, Inc. ("HCS") in 1990. HCS
operates from one location in Las Vegas, Nevada. There are approximately 20
wholesale HVACR distributors in the Las Vegas area that are considered by
management to be competitors of HCS. Management believes that HCS is in the
top quarter of such distributors in terms of annual sales from branch
operations in the local area.
Both the residential and commercial new construction markets have
flourished in Las Vegas in recent years, and approximately 80% of HCS's
sales are in the new construction markets. HCS has successfully expanded
its business in the commercial HVACR market by emphasizing the company's
capabilities in both the plan and specifications market and the specialty
products market. HCS's proficiency in these two niches distinguishes it
from most other HVACR distributors and, as a result, sales to commercial
accounts were approximately 40% of total sales at the end of fiscal 1996.
In 1994, HCS was granted a franchise to distribute the Janitrol brand of
HVACR equipment in the Las Vegas trade area. The Janitrol brand is
positioned in the industry as a low-cost, high-quality product for the
residential market, and is a companion brand to GMC, which the Company has
marketed successfully in Georgia. Both brands are manufactured by Goodman
Manufacturing Company in Houston. In fiscal 1996, HCS's sales of Janitrol
equipment increased to 36% of total sales, compared to 9% in fiscal 1995.
Management is continuing to promote Janitrol products to attract customers
that serve the HVACR aftermarket.
TOTAL SUPPLY, INC.
In 1990, the Company organized Total Supply, Inc. ("TSI") to fabricate air
conditioning ductwork out of fiber glass ductboard, and in 1992 converted
the company's business to HVACR wholesale distribution. In December 1992,
TSI was granted the distribution rights for the GMC brand of HVACR
equipment in the Atlanta trade area. The Atlanta area is consistently in
the top three geographic markets for installation of new HVACR systems, and
GMC equipment is well suited for new construction because of its very
competitive price and excellent warranty.
- 6 -
<PAGE>
TSI sells almost exclusively to the residential market, and management
estimates that sales are approximately evenly split between new
construction and the aftermarket. The company's sales mix is approximately
68% equipment and 32% parts and supplies.
At the end of fiscal 1995, TSI had two branches, both located in the
Atlanta metropolitan area. In fiscal 1996, two additional branches of TSI
were opened in the Atlanta area. Additionally, in October 1995, TSI
acquired Sweet Georgia Air Supply, Inc., an HVACR distributor with two
branch operations and the rights to distribute GMC equipment in most of the
area of Georgia south of Atlanta. TSI now has the GMC distribution rights
for virtually the entire state of Georgia.
VALLEY SUPPLY, INC.
In 1994, the Company organized Valley Supply, Inc. ("VSI") as an HVACR
distributor in the Memphis, Tennessee trade area, which includes
southwestern Tennessee, northern Mississippi and western Arkansas. The
Company was granted the franchise to distribute the GMC line of equipment
within this trade area, succeeding another distributor which ceased
business operations. VSI employs most of the key personnel from that
former GMC distributor. Approximately 85% of VSI's sales consisted of GMC
equipment in fiscal 1996. Management is continuing increase the breadth of
parts and supplies stocked at VSI, in order to increase the percentage of
total sales of these higher margin products. In April 1996, the Company
opened a second branch of VSI in Memphis to serve the southern section of
the city and the north Mississippi trade area.
ENER-TECH INDUSTRIES, INC.
Effective January 1, 1996, the Company acquired Ener-Tech Industries, Inc.
("ETI"), an HVACR distributor with one branch in Nashville, Tennessee.
Unlike the Company's other HVACR distribution operations, ETI specializes
in an industry segment. ETI sells controls and control systems to
commercial and industrial end-users, HVACR contractors, dealers and other
distributors. ETI also designs and assembles control systems used in
commercial applications such as hospitals, restaurants and supermarkets.
Such control systems perform a variety of functions including temperature
control and monitoring, lighting control and energy management.
ETI is an authorized distributor for Honeywell, Inc. for much of Tennessee
and parts of Kentucky. By providing engineering services and assembly
processes for its customers in connection with the sale of control systems,
ETI obtains a higher gross margin on its sales that the Company's other
distribution businesses. Additionally,
- 7 -
<PAGE>
ETI's sales tend to be greater in the cooler seasons of the year, when gas
controls are in higher demand. The Company plans to expand ETI's market
presence within its Honeywell authorized territory initially by
establishing a physical association with VSI in Memphis.
FLORIDA COOLING SUPPLY, INC.
In March 1996, the Company organized Florida Cooling Supply, Inc. ("FCS")
and in April 1996, opened four branch operations in central Florida. The
state of Florida is among the three largest in the United States in terms
of installed HVACR systems. FCS is managed by two persons with extensive
industry experience in FCS's trade area. The Company has not secured the
rights to distribute a full line of HVACR equipment at FCS, but believes
that it will obtain such rights for a major brand of equipment in fiscal
1997. However, such rights are not a prerequisite to the expected
profitability of FCS.
ENERGY SERVICE BUSINESS
In the early 1980's, the Company's primary business was the design,
installation and management of integrated systems intended to reduce energy
costs ("Systems") for users of commercial, industrial and institutional
facilities ("Users"). ACRG did not install any new Systems after 1985.
Pursuant to contracts between the Company and the Users, Users pay ACRG a
specified percentage of the utility cost savings attributable to the System over
the term of the contract. The Company's contracts for its remaining Systems all
expired during fiscal 1996. The Users declined to extend the contracts;
however, the Company continues to manage 15 Systems under contract with two
Users on a month to month basis. The Company cannot predict for how long such
an informal arrangement may continue.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
NAME AGE POSITION WITH THE COMPANY
Alex Trevino, Jr. 59 Chairman of the Board and President
Anthony R. Maresca 45 Senior Vice President, Secretary, Treasurer,
and Chief Financial Officer
Alex Trevino, Jr. has served as Chairman of the Board since 1988, and as
President and Chief Executive Officer of the Company since July 1990. From
February 1990 until his date of employment, he was a consultant to the Company.
From September 1987 to
- 8 -
<PAGE>
February 1990, he served as President of Western Operations of the Refrigeration
and Air Conditioning Group of MLX Corporation (now Pameco Corporation), which is
a national distributor of HVACR equipment and supplies.
Anthony R. Maresca has been employed by the Company since June 1985,
serving as Corporate Controller until November 1985 when he was promoted to
Senior Vice President, Chief Financial Officer and Treasurer. Mr. Maresca is a
certified public accountant.
EMPLOYEES
As of February 29, 1996, the Company and its subsidiaries had approximately
170 full-time employees. Neither the Company nor its subsidiaries routinely use
temporary labor. None of the Company's employees are represented by any
collective bargaining units. Management considers the Company's relations with
its employees to be good.
ITEM 2. PROPERTIES.
The Company and its subsidiaries occupy office and warehouse space under
operating leases with various terms. Generally, a branch location will contain
10,000 to 20,000 square feet of showroom and warehouse space. Branch locations
that include a subsidiary's corporate office will be larger. In 1995, the
Company completed construction of an 18,000 square foot warehouse for the
Pasadena, Texas branch of ACRS. In April 1996, the Company acquired
land in Temple, Texas to construct a building that will replace the existing
leased premises. The Company is considering the sale of the Temple property to
parties who would construct the building and lease it to the Company under a
long-term arrangement.
ITEM 3. LEGAL PROCEEDINGS.
As of February 29, 1996 the Company was not a party to any pending legal
proceeding that is deemed to be material to the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended February 29, 1996.
- 9 -
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock trades on the NASDAQ small-cap market under the
symbol "ACRG." The table below sets forth the high and low sales prices based
upon actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Fiscal Year 1996
1st quarter ended 5/31/95 $1 1/16 $ 21/32
2nd quarter ended 8/31/95 13/16 5/8
3rd quarter ended 11/30/95 7/8 1/2
4th quarter ended 2/29/96 13/16 1/2
Fiscal Year 1995
1st quarter ended 5/31/94 $ 7/8 $ 3/8
2nd quarter ended 8/31/94 15/16 5/8
3rd quarter ended 11/30/94 7/8 5/8
4th quarter ended 2/28/95 3/4 7/16
</TABLE>
As of April 30, 1996, there were 569 holders of record of the Company's
common stock. This number does not include the beneficial owners of shares held
in the name of a broker or nominee.
The Company has never declared or paid cash dividends on its common stock.
The Company's loan agreements with two lenders each expressly prohibit the
payment of dividends by the Company. See Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources, and Note 4 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Company have been derived from
the consolidated financial statements. This summary should be read in
conjunction with the consolidated financial statements and related notes
included in Item 8 of this Report. As of February 28, 1993, the Company
acquired ACR Supply, Inc.; the accounts of ACRS are consolidated in the Balance
Sheet Data presented herein as of such date. The results of operations of ACRS
are included in the Income Statement Data only for the fiscal years ending after
February 28, 1993. The Company has never paid any dividends. See Management's
Discussion and Analysis - Results of Operations - Fiscal 1995 Compared to Fiscal
1994 for a discussion of the change in accounting for income taxes.
-10-
<PAGE>
<TABLE>
<CAPTION>
(In thousands except per share data)
Year Ended
--------------------------------
February 29, February 28, Year Ended June 30,
------------ ---------------- ---------------------
Income Statement Data: 1996 1995 1994 1993 * 1992 1991
------------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Sales $56,500 $41,281 $30,862 $3,192 $5,900 $4,857
Gross profit 10,721 8,563 6,738 807 1,334 1,153
Operating income (loss) 765 945 615 185 (635) (904)
------- ------- ------- ------ ------ ------
Income (loss) before income
taxes, extraordinary item
and cumulative effect of
an accounting change 199 562 443 219 (267) (437)
Income taxes (15) (4) (9) (71) - (29)
Extraordinary item - - - 71 - -
Cumulative effect of an
accounting change - - 680 - - -
------- ------- ------- ------ ------ ------
Net income (loss) $ 184 $ 558 $ 1,114 $ 219 $ (267) $ (466)
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------
Amounts per share:
Earnings (loss) before
extraordinary item and
cumulative effect of
an accounting change .02 .05 .04 .02 $ (.04) $ (.07)
Extraordinary item - - - .01 - -
Cumulative effect of an
accounting change - - .07 - - -
------- ------- ------- ------ ------ ------
Net earnings (loss) $ .02 $ .05 $ .11 $ .03 $ (.04) $ (.07)
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
As of
-------------------------------------------
February 29, February 28, As of June 30,
------------ ---------------------------- -----------------
Balance Sheet Data: 1996 1995 1994 1993 * 1992 1991
------------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 8,118 $ 5,818 $ 3,338 $1,945 $1,524 $1,792
Total assets 22,010 17,131 13,024 9,974 4,755 5,549
Long-term obligations 6,703 3,728 1,752 1,094 342 838
Shareholders' equity 5,666 5,482 4,924 3,461 2,680 2,947
</TABLE>
*Transition period from July 1, 1992 to February 28, 1993
- 11 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Operating income declined 19%, from $945,607 in fiscal year 1995 to
$764,714 in fiscal 1996, because of lower gross margins on sales, start-up costs
associated with the opening of new branch operations, and increased inventory
shrinkage. Additionally, higher interest costs associated with borrowings
required to support the sales growth of the Company resulted in a reduction of
net income to $183,766 in fiscal 1996, compared to $558,206 in fiscal 1995, a
decline of 67%.
Sales increased 37%, from $41.3 million to $56.5 million, in fiscal 1996
compared to fiscal 1995, with each subsidiary reporting a significant increase
in sales. Sales at ACRS increased 19% in fiscal 1996. Same store sales at ACRS
increased 16% in fiscal 1996, compared to 13% in fiscal 1995; a new branch in
south Texas accounted for the remainder of the sales increase.
Sales at TSI increased 72% in fiscal 1996; aggregate sales at the two
branches that existed at the beginning of fiscal 1996 increased 4% in fiscal
1996 despite the opening during the year of two additional, larger branches
within the same metropolitan Atlanta trade area. TSI also acquired two branch
operations in central and south Georgia by purchasing the stock of Sweet Georgia
Air Supply, Inc. in October 1995. Although the two former Sweet Georgia
branches were marginally profitable in fiscal 1996, the acquisition expanded the
territory in which TSI has the distribution rights to sell the GMC brand of
HVACR equipment to almost the entire state of Georgia. Sales of the GMC line of
HVACR equipment represented 68% of TSI's sales in both of fiscal 1996 and 1995.
Sales at HCS rose 45% in fiscal 1996, as the Company maintained its strong
presence in the commercial HVACR market while significantly expanding its sales
of the Janitrol brand of HVACR equipment in the residential market sector.
Janitrol equipment sales represented 36% of HCS's sales in fiscal 1996, compared
to 9% in fiscal 1995, the first year that HCS distributed Janitrol equipment.
Sales at VSI increased 80% in fiscal 1996 from fiscal 1995, when VSI first
opened. VSI gradually enlarged its sales of products other than GMC equipment
in fiscal 1996. Sales of GMC equipment comprised 85% of VSI's sales in fiscal
1996 compared to 90% in fiscal 1995. The Company acquired ETI, in January 1996,
and ETI's results of operations are included in the consolidated financial
statements beginning with the effective date of the acquisition. ETI's sales
represent only 2% of the increase in the Company's sales from 1995 to 1996.
12
<PAGE>
The Company's gross margin percentage declined to 19.0% in fiscal 1996 from
20.7% in fiscal 1995. This is a result of the continually increasing percentage
of the Company's sales that are generated by TSI and VSI, which sell
substantially more HVACR equipment than other products. In addition, the
increase in Janitrol equipment sales at HCS, as described above, reduced HCS's
gross margin percentage by almost 4% in fiscal 1996 compared to 1995. In the
HVACR industry, the profit margin on sales of equipment, such as condensing
units, furnaces and heat pumps, is generally less than on sales of parts and
supplies. Furthermore, the primary equipment supplier to TSI, HCS and VSI
provides incentives to its distributors to induce a greater volume of sales at
lower gross margins. The gross margin percentage at ACRS also declined 1.6% in
1996, as the company gained market share in part by negotiating bulk sales to
customers at low margins of products that could be shipped directly to the
customer from the manufacturer. Gross margin in fiscal 1996 was also adversely
affected by excessive inventory shrinkage at two of the Company's subsidiaries
that were detected in connection with physical inventories. In response, the
Company has instituted a rigorous system of inventory cycle counts designed to
promptly identify and reconcile inventory shortages.
Selling, general and administrative costs ("SG&A") as a percentage of sales
declined to 17.8% in fiscal 1996, compared to 18.9% in fiscal 1995. With
payroll costs representing 56% of SG&A expenses in fiscal 1996, the Company
continues to focus on increasing the sales volume of each of its branch
operations as a means to generate higher gross profit without a proportional
increase in SG&A expenses. Management expects that SG&A expenses will continue
to decline as a percentage of sales.
Net operating income from energy services decreased 36% from fiscal 1995 to
fiscal 1996. In 1995, the Company recognized non-recurring revenue following a
review of an energy savings contract which revealed that the Company had not
received certain funds due under the terms of the contract. Excluding revenues
from this contract, net energy service income declined 15% from 1995 to 1996.
All of the Company's remaining energy contracts expired in fiscal 1996.
Although none of the contracts have been formally extended, the Company is
continuing to provide service on a month-to-month basis to the largest customer
under such contracts. Management cannot estimate how long such an informal
arrangement may continue.
Interest expense increased 43% in fiscal 1996 compared to 1995 as a result
of the Company's increased borrowings. In both 1996 and 1995, interest expense
was 1.1% of sales. See Liquidity and Capital Resources, below.
Income tax expense consists principally of state income taxes. As a result
of the Company's utilization of previously unrecognized net operating losses,
the Company had minimal Federal income tax expense or liability. See
Liquidity and Capital Resources, below.
- 13 -
<PAGE>
In March 1996, the Company organized a new subsidiary, Florida Cooling
Supply, Inc., and in April 1996, opened four branch operations in central
Florida. Florida is among the three largest states in the country in terms of
installed HVACR systems. In April 1996, the Company also opened a second branch
of VSI in the Memphis area.
The Company expects that fiscal 1997 sales will increase at least 25% over
fiscal 1996. Management is aggressively seeking to reduce its cost of inventory
purchases by negotiating arrangements with national suppliers covering all of
the Company's operating entities and believes that this effort may alleviate a
further decline in the Company's gross margin percentage. In addition, ETI,
which specializes in the sale of commercial controls systems, generates a
significantly higher gross margin than the Company's other subsidiaries.
Management is also resolved to further reduce operating expenses as a percentage
of sales by controlling personnel costs as branch sales increase.
FISCAL 1995 COMPARED TO FISCAL 1994
Operating income increased 54%, from $615,372 in 1994 to $945,607 in 1995,
because of improvement in operating results at each of the Company's
subsidiaries compared to the previous year. Additionally, VSI was profitable in
its first year of operation. Because of a non-recurring tax benefit of $680,000
in 1994, net income decreased from $1,114,068 for the fiscal year ended February
28, 1994 to $558,206 for the fiscal year ended February 28, 1995. The tax
benefit reflected the cumulative effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 109, with respect to accounting for income
taxes. See Note 6 of Notes to Consolidated Financial Statements.
Sales increased 34%, from $30.9 million to $41.3 million, in fiscal 1995
compared to fiscal 1994, with each subsidiary reporting significant increases in
sales. Sales at ACRS increased 13% in fiscal 1995 with no new branches,
compared to an 8% increase in same store sales in fiscal 1994. Sales at TSI
increased 110% in fiscal 1995; same store sales increased 34% with the remainder
of the increase attributable to the opening of a second branch in April 1994.
Sales of the GMC line of HVACR equipment represented 68% of TSI sales in both of
fiscal 1995 and 1994. Sales at HCS rose 33% in fiscal 1995, continuing a trend
of increasing its sales to the commercial market which began in fiscal 1994.
Sales to the commercial market now represent approximately 50% of HCS's sales,
whereas the Company's other sales are predominantly to the residential market
sector. Sales of the Janitrol brand of HVACR equipment, which HCS began
distributing in fiscal 1995, represented over 9% of HCS's sales. The Company
opened VSI during fiscal 1995 and VSI's sales represented 19% of the increase in
sales from fiscal 1994. Like TSI, VSI is a distributor of the GMC line of
equipment, and sales of GMC equipment comprised 90% of VSI's sales in fiscal
1995.
The Company's gross margin percentage declined to 20.7% in fiscal 1995 from
21.8% in fiscal 1994. This is a result of the increasing percentage of the
Company's sales that are
- 14 -
<PAGE>
generated by TSI and VSI, which sell substantially more HVACR equipment than
other products. Additionally, in fiscal 1995, the primary supplier to TSI and
VSI modified its distributor rebate program to induce a greater volume of sales
at a lower gross margin.
Selling, general and administrative costs as a percentage of sales declined
to 18.9% in fiscal 1995 from 20.2% in fiscal 1994, as the Company continued to
limit increases in both administrative and branch operating costs in relation to
increases in sales. Management believes that operating expenses should continue
to grow at a lesser rate than sales.
Net operating income from energy services increased 69% from fiscal 1994 to
fiscal 1995. The increase consisted of revenues from a contract sold in 1986 to
a third party pursuant to which the Company was to receive a percentage of
future net income from an energy savings project. In fiscal 1995, an accounting
of the project's income revealed that the third party had not fulfilled its
payment obligations to the Company, and agreement was reached for payment of the
arrearage and resumption of contractually required payments. Although none of
the Company's remaining energy contracts expired in fiscal 1995, they all are
due to expire during fiscal 1996. The remaining contracts will be profitable up
to their expiration, at which time management will attempt to negotiate with the
users a form of payment for the residual value of the installed equipment.
Interest expense increased 105% in fiscal 1995 compared to 1994 as a result
of the Company's increased borrowings and increases in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $5,818,000 at February 28, 1995 to
$8,118,000 at February 29, 1996 as a result of the Company's increased
operations, which resulted in increases in accounts receivable and inventory
that were financed largely through long-term borrowings. Current assets
increased 29% from 1995 to 1996, principally in accounts receivable and
inventory. Gross receivables represented 49 days of sales at the end of fiscal
1996, compared to 50 days of sales in receivables at the end of fiscal 1995. Of
the $1.6 million increase in inventory, $600,000 was attributable to an increase
in pre-season shipments of air conditioning equipment received by ACRS from its
primary supplier. The remainder of the increase in inventory was attributable
to the inventory at ETI and to the inventory requirements of the five branch
operations that were opened in fiscal 1996.
In February 1996, the Company's credit lines with a commercial bank
("Bank") were amended to increase the revolving line of credit from $5 million
to $8 million and to increase the availability of financing for capital
equipment from $350,000 to $500,000. The maturity date of the revolving line of
credit was extended to February 28, 1998. At February 29, 1996, the Company's
outstanding borrowings were $4.9 million and $144,266 under the respective
credit lines. Borrowings are secured by accounts receivable and inventory, and
the permitted amount of outstanding borrowings at any time is limited to
- 15 -
<PAGE>
percentages of certain accounts receivable and inventory. Borrowings under the
credit line bear interest at the Bank's prime rate plus 1%, payable monthly, and
may be reduced to 1/2% above prime upon attainment of specified levels of net
income. Restrictive covenants of the loan agreement prohibit the Company from
paying dividends, prepaying its debt to The Catalyst Fund, Ltd. or incurring
other debt without the Bank's consent, and also require the Company to maintain
certain financial ratios. Borrowings under the revolving line of credit were
used for working capital. The Bank also financed the Company's purchase of land
and construction of a building for its Pasadena, Texas branch location. The
outstanding balance of the related real estate loan at the end of fiscal 1996
was $408,000. The loan is repaid in monthly installments of $2,400, plus
interest at prime plus 1%, until April 30, 2000, when the unpaid balance of the
note is due. See Note 4 of Notes to Consolidated Financial Statements. The
Company has obtained amendments or waivers of certain covenants in the
Company's loan agreements with the Bank and Catalyst. These amendments and
waivers cure any non-compliance with such covenants as of February 29, 1996,
and the Company expects to be in compliance with all covenants during fiscal
1997.
In connection with the purchase of ETI, the Company issued notes to the
sellers which aggregated $291,789 and are payable in equal quarterly
installments, including interest at 9%, to December 2000. These notes are
unsecured and are subordinated to the Company's indebtedness to the Bank. In
addition, certain debt of ETI aggregating $100,000 that was assumed by the
Company in connection with the acquisition was refinanced such that the lenders
have subordinated the debt to the Company's borrowings from the Bank.
Management believes that funds available under the revolving line of credit
will be adequate to support planned internal growth and start-up activities in
fiscal 1997. The Company expects to expend up to $1 million for the initial
inventory and capital equipment requirements of the four branch operations
opened in Florida in April 1996. In April 1996, the Company acquired land in
Temple, Texas to construct a building that will replace the existing branch
location, and in May 1996, entered into a contract to purchase land in Las Vegas
on which the Company intends to ultimately build a facility to replace the
existing branch operation and administrative offices of HCS. The Company has
not arranged financing for the construction of either the Temple or Las Vegas
facility and may seek a buyer for one or both properties which would construct
the buildings according to the Company's specifications and lease the premises
to the Company under long-term arrangements.
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. Certain provisions of the Internal Revenue Code
("Code") regulate the amount of additional stock that the Company could issue
without resulting in a change in ownership control, as defined in the Code.
Should such a change in control be deemed to occur, the Company's ability to
utilize its operating loss and tax credit carryforwards would be severely
restricted. See Note 6 of Notes to Consolidated Financial Statements.
- 16 -
<PAGE>
SEASONALITY
The Company's sales volume varies significantly during its fiscal year.
The highest levels of sales occur during the times of the year when climatic
conditions require the greatest use of air conditioning, since the Company's
operations are concentrated in the warmer regions of the United States.
Accordingly, sales will be highest in the Company's second fiscal quarter ending
August 31, and will be lowest in its fourth fiscal quarter.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations in recent years. Generally, manufacturer price
increases attributable to inflation uniformly affect both the Company and its
competitors, and such increases are passed through to customers as an increase
in sales prices.
- 17 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF ACR GROUP, INC. AND SUBSIDIARIES
PAGE
Reports of Independent Auditors 19
Consolidated balance sheets as of February 29, 1996 and
February 28, 1995 20
Consolidated statements of operations for the fiscal years
ended February 29, 1996, February 28, 1995 and 1994 22
Consolidated statements of shareholders' equity for the
fiscal years ended February 29, 1996, February 28, 1995
and 1994 23
Consolidated statements of cash flows for the fiscal years
ended February 29, 1996, February 28, 1995 and 1994 24
Notes to Consolidated Financial Statements 26
- 18 -
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ACR Group, Inc.
We have audited the accompanying consolidated balance sheets of ACR Group, Inc.
and subsidiaries as of February 29, 1996 and February 28, 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended February 29, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries at February 29, 1996 and February 28, 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 29, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 6 to the consolidated financial statements, effective March
1, 1993, the Company changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Houston, Texas
May 24, 1996
- 19 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
ASSETS
1996 1995
Current assets:
Cash $ 348,162 $ 162,745
Accounts receivable, net of
allowance for doubtful accounts
of $459,501 in 1996 and
$415,455 in 1995 7,188,839 4,720,279
Inventory 9,934,637 8,353,511
Prepaid expenses and other 151,027 366,888
Deferred income taxes 136,000 136,000
----------- -----------
Total current assets 17,758,665 13,739,423
----------- -----------
Property and equipment, net of
accumulated depreciation 2,110,997 1,268,771
Deferred income taxes 544,000 544,000
Goodwill, net of accumulated
amortization of $121,770 in 1996
and $79,801 in 1995 1,470,665 1,384,933
Other assets 125,959 194,617
----------- -----------
Total assets $22,010,286 $17,131,744
----------- -----------
----------- -----------
- 20 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
--------- --------
Current liabilities:
Current maturities of long-term debt $ 579,485 $ 578,557
Current maturities of capital lease
obligations 135,325 107,890
Accounts payable 8,377,600 6,738,283
Accrued expenses and other
liabilities 548,194 496,770
----------- -----------
Total current liabilities 9,640,604 7,921,500
----------- -----------
Long-term debt 6,397,722 3,568,647
Long-term capital lease obligations 305,748 159,151
----------- -----------
Total liabilities 16,344,074 11,649,298
----------- -----------
Contingencies and commitments
Shareholders' equity:
Preferred stock, $.01 par,
authorized 2,000,000 shares,
none outstanding
Common stock - $.01 par,
authorized 25,000,000 shares,
issued and outstanding
10,246,555 shares in 1996 and
1995 102,466 102,466
Additional paid-in capital 41,427,020 41,427,020
Accumulated deficit (35,863,274) (36,047,040)
----------- -----------
Total shareholders' equity 5,666,212 5,482,446
----------- -----------
Total liabilities and
shareholders' equity $22,010,286 $17,131,744
----------- -----------
----------- -----------
The accompanying notes are an integral part
of these financial statements.
- 21 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Sales $56,500,253 $41,281,119 $30,862,132
Cost of sales 45,779,447 32,717,879 24,123,825
----------- ----------- -----------
Gross profit 10,720,806 8,563,240 6,738,307
Selling, general and
administrative expenses (10,082,119) (7,814,189) (6,239,325)
Energy services income, net 126,027 196,556 116,390
----------- ----------- -----------
Operating income 764,714 945,607 615,372
Interest expense (644,767) (451,305) (219,929)
Other non-operating income 78,863 67,404 48,025
----------- ----------- -----------
Income before income taxes
and cumulative effect of a
change in accounting principle 198,810 561,706 443,468
Provision for income taxes 15,044 3,500 9,400
----------- ----------- -----------
Income before cumulative effect
of a change in accounting
principle 183,766 558,206 434,068
Cumulative effect of change in
accounting principle - - 680,000
----------- ----------- -----------
Net income $ 183,766 $ 558,206 $ 1,114,068
----------- ----------- -----------
----------- ----------- -----------
Earnings per common share:
Income before cumulative
effect of change in
accounting principle $ .02 $ .05 $ .04
Cumulative effect of
change in accounting
principle - - .07
----------- ----------- -----------
$ .02 $ .05 $ .11
----------- ----------- -----------
----------- ----------- -----------
Average outstanding common
and equivalent shares 10,513,485 10,613,038 10,112,734
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part
of these financial statements.
- 22 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND 1994
<TABLE>
<CAPTION>
Additional
No. of Shares Paid-In Accumulated Treasury
Issued Par Value Capital Deficit Stock Total
------------- --------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1993 9,845,305 $ 98,453 $41,281,570 $(37,719,314) $(200,000) $3,460,709
Sale of treasury stock -
672,969 shares 49,463 200,000 249,463
Stock options exercised 401,250 4,013 95,987 100,000
Net income - - - 1,114,068 - 1,114,068
------------- --------- ---------- ------------- ---------- ----------
Balance, February 28, 1994 10,246,555 102,466 41,427,020 (36,605,246) - 4,924,240
Net income - - - 558,206 - 558,206
------------- --------- ---------- ------------- ---------- ----------
Balance, February 28, 1995 10,246,555 102,466 41,427,020 (36,047,040) - 5,482,446
Net income - - - 183,766 - 183,766
------------- --------- ---------- ------------- ---------- ----------
Balance, February 29, 1996 10,246,555 $102,466 $41,427,020 $(35,863,274) $ - $5,666,212
------------- --------- ---------- ------------- ---------- ----------
------------- --------- ---------- ------------- ---------- ----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 23 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 29, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 183,766 $ 558,206 $1,114,068
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and
amortization 542,965 444,803 335,329
Cumulative effect of
change in accounting
principle (680,000)
Provision for bad debts 326,349 218,052 128,135
(Gain) loss on sale of
assets 8,395 (20,859) (1,702)
Increase (decrease) from
changes in:
Accounts receivable (2,192,222) (742,063) (1,386,988)
Inventory (1,090,047) (3,367,311) (875,484)
Prepaid expense and
other assets 297,499 7,775 (151,494)
Accounts payable 1,009,879 1,317,439 1,040,715
Accrued expenses and
other liabilities 22,058 155,054 (15,433)
----------- ----------- -----------
Net cash used in operating
activities (891,358) (1,428,904) (492,854)
----------- ----------- -----------
Investing activities:
Acquisition of property and
equipment (956,744) (445,843) (325,240)
Acquisition of businesses
net of cash acquired (94,813)
Proceeds from disposition of
assets 27,844 30,160 14,584
----------- ----------- -----------
Net cash used in investing
activities (1,023,713) (415,683) (310,656)
----------- ----------- -----------
Financing activities:
Proceeds from long-term debt 3,045,019 2,636,822 1,000,000
Payments on long-term debt (944,531) (679,769) (637,306)
Proceeds from exercise of
common stock options 100,000
Sale of treasury stock 234,463
----------- ----------- -----------
Net cash provided by financing
activities 2,100,488 1,957,053 697,157
----------- ----------- -----------
Net increase (decrease) in cash 185,417 112,466 (106,353)
Cash at beginning of year 162,745 50,279 156,632
----------- ----------- -----------
Cash at end of year $ 348,162 $ 162,745 $ 50,279
----------- ----------- -----------
----------- ----------- ----------
</TABLE>
(continued)
- 24 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Schedule of non-cash investing
and financing activities:
Acquisition of subsidiaries:
Liabilities in excess of
non-cash assets acquired $ 92,701 $ $
Goodwill 127,701
Notes payable to sellers 291,789
Purchase of equipment (net
of cash paid) under
capital leases 289,921 119,750 214,138
Long-term debt exchanged for
equity (15,000)
Supplemental cash flow
information:
Interest paid 635,585 462,237 240,252
Federal income taxes paid 6,062 5,000 400
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 25 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ACR Group, Inc.'s (the "Company") principal business is the wholesale
distribution of heating, ventilating, air conditioning and refrigeration
("HVACR") equipment, parts and supplies in central and south Texas; Georgia; Las
Vegas, Nevada; and Memphis, Tennessee.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ACR Group,
Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized at the time the merchandise is shipped or delivered
to the customer at the point of sale.
ENERGY SERVICES
Revenues from energy service contracts, which expired in 1996 and continue
on a month-to-month basis, are recognized when the related energy cost savings
are billed to the user. These revenues are insignificant to the sales of the
Company and are presented net of costs to provide such services.
INVENTORIES
Inventories are valued at the lower of cost or market using the average
cost method. Substantially all inventories represent finished goods held for
sale. 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
- 26 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INVENTORIES (continued)
balance sheet. As of February 29, 1996, the cost of such inventory held in the
bonded warehouses was $10,881,771.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the following estimated useful
lives. Energy management equipment is fully depreciated.
Buildings 40 years
Leasehold improvements Primary term of the lease
Furniture and fixtures 5-7 years
Vehicles 3-5 years
Other equipment 3-10 years
INTANGIBLE ASSETS
Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Goodwill is being amortized on a straight-line
basis over 10-40 years. The carrying value of goodwill is reviewed if the facts
and circumstances suggest that it may be impaired. If this review indicates
that goodwill will not be recoverable, as determined based on the undiscounted
cash flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of the undiscounted cashflows.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement
No. 121 in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of adoption will be material.
- 27 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. The Company adopted the liability method of accounting for income taxes
in its financial statements effective March 1, 1993 due to the issuance in
February 1992 by the Financial Accounting Standards Board of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, the liability method is used in accounting for
income taxes. Under the method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
EARNINGS PER SHARE
Earnings per share are based upon earnings applicable to common shares and
the average number of shares of common stock and dilutive common stock
equivalents (stock options and warrants) outstanding.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
stock options.
SUPPLIER/SOURCES OF SUPPLY
The Company currently purchases a majority of its HVACR equipment and
repair parts from two primary suppliers. The Company has not encountered any
significant difficulty to date in obtaining equipment and repair parts to
support its operations at current or expected near-term future levels. However,
any disruption in these supply sources could have an adverse effect upon the
Company's operations.
2 - ACQUISITIONS
In January 1996, the Company acquired all of the outstanding capital stock
of Ener-Tech Industries, Inc. ("ETI"), a Tennessee corporation, for $72,947 cash
and $291,789 in notes payable to the sellers (See Note 4). ETI is an HVACR
distributor specializing in commercial and industrial controls.
- 28 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2 - ACQUISITIONS (continued)
In October 1995, the Company acquired for $75,000 cash all of the
outstanding capital stock of Sweet Georgia Air Supply, Inc. ("SGAS"), a Georgia
corporation. SGAS was an HVACR distributor in south Georgia principally selling
the GMC brand of HVACR equipment. Immediately following the acquisition, SGAS
was merged into Total Supply, Inc., the Company's subsidiary doing business in
Georgia. The Company recorded goodwill of $127,701 in connection with the
acquisition of SGAS.
In each of the above acquisitions, the Company may be obligated to remit to
the sellers collections of certain delinquent accounts receivable during the
first year following the purchase. The Company may also offset amounts owed to
the sellers by any liabilities of the acquired company that were unrecorded as
of the purchase date.
Each of the acquisitions was accounted for using the purchase method of
accounting, and the consolidated financial statements include the operating
results of each business from the date of acquisition. Pro forma results of
operations are not presented because the effects of these acquisitions were not
significant.
3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at the end of February:
1996 1995
---------- ----------
Land $ 68,593 $ 68,593
Building and leasehold
improvements 820,820 316,957
Furniture and fixtures 107,925 97,482
Vehicles 900,926 593,929
Other equipment 1,294,909 880,815
Energy management equipment 388,612 388,612
---------- ----------
3,581,785 2,346,388
Less accumulated depreciation (1,470,788) (1,077,617)
---------- ----------
Net property and equipment $2,110,997 $1,268,771
---------- ----------
---------- ----------
Capitalized lease assets of $654,359 and $460,869, together with
accumulated amortization of $198,847 and $156,220, are included in property and
equipment as of February 29, 1996 and February 28, 1995, respectively.
Amortization expense is included with depreciation expense.
- 29 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - DEBT
Debt is summarized as follows at the end of February:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revolving line of credit $4,900,000 $2,400,000
Real estate loan 408,000 82,068
Equipment loans 144,266 108,478
Notes payable - Catalyst Fund 718,038 886,626
Notes payable to sellers of
companies acquired (Note 2) 291,789 106,714
Obligation to trade creditor 325,000 487,500
Other 190,114 75,818
---------- ----------
6,977,207 4,147,204
Less current maturities (579,485) (578,557)
---------- ----------
Long-term debt, less current
maturities $6,397,722 $3,568,647
---------- ----------
---------- ----------
</TABLE>
The Company has a revolving line of credit arrangement with a commercial
bank ("Bank") pursuant to which the Company may borrow up to $8 million,
including amounts outstanding under standby letters of credit. Borrowings are
secured by accounts receivable and inventory, and the permitted amount of
outstanding borrowings at any time is limited to specified percentages of
certain accounts receivable and inventory. Borrowings under the line of credit
bear interest at the prime rate plus 1% (9 3/4% at February 29, 1996), payable
monthly. The credit line matures on February 28, 1998. Restrictive covenants
of the loan agreement prohibit the Company from paying dividends, prepaying its
indebtedness to The Catalyst Fund, Ltd. ("Catalyst") or incurring other debt
without the Bank's consent, and also require the Company to maintain certain
financial ratios. As of February 29, 1996, the Company had $4.9 million in
outstanding borrowings under the line of credit and had issued letters of credit
aggregating $600,000 to secure its trade credit line from a supplier. At
February 29, 1996, there was $1,529,023 available under this line of credit.
The Company also borrowed $432,000 from the Bank to construct a warehouse
and office building to replace an existing branch location in the Houston area.
The building was completed in July 1995. The note is being repaid in equal
monthly principal installments of $2,400, plus interest at the prime rate plus
1%, with the unpaid principal balance due at maturity April 30, 2000. The loan
is secured by a deed of trust on both the land and the building.
- 30 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - DEBT (continued)
The Company has also obtained a term loan facility from the Bank under
which the Company may borrow up to $500,000 to purchase capital equipment.
Borrowings under the facility bear interest at the prime rate plus 1%, and
principal is to be repaid monthly over an amortization period of 48 months. The
Company pays an annual commitment fee of 1/4% for the line of credit facility,
and is further required to pay 1/4% per annum on the unused balance of the line
of credit.
In May 1993, the Company obtained a loan from The Catalyst Fund, Ltd. for
$1 million, the proceeds of which were used to pay the cash portion of the
purchase price of ACR Supply, Inc. ("ACRS") and for working capital for ACRS.
The loan bears interest at 12 1/2% per annum and is secured by the stock and
operating assets of the Company's subsidiaries and an assignment of proceeds
from a life insurance policy on the Company's President. The loan is being
repaid in 60 equal monthly installments of $22,498, including interest, with the
final payment due in May 1999. In addition, Catalyst received a warrant to
purchase one million shares of the Company's common stock at a price of $.59 per
share, exercisable at any time before May 1999. Covenants of the loan agreement
prohibit dividends and restrict additional borrowings without Catalyst's
consent, and also require the Company to maintain specified financial ratios.
Catalyst has subordinated its security interests in connection with the bank
financing obtained by the Company.
The notes issued as part of the purchase price of ETI ("ETI Notes") bear
interest at 9% per annum, and are payable in equal quarterly installments,
including interest, to December 2000. The ETI Notes are unsecured and are
subordinated to the Company's borrowings from the Bank. The Company also issued
notes ("ACRS Notes") to the sellers in connection with the acquisition of ACRS
in 1993. The ACRS Notes bore interest at 8% per annum, and were payable in
equal quarterly installments, including interest, based on a five-year
amortization period. The balance of the ACRS Notes was paid in February 1996.
A supplier permitted a subsidiary of the Company to forego payment on usual
terms for certain merchandise purchased and, in 1993, the Company and the
supplier agreed on a repayment schedule such that $650,000 would be repaid in
four equal annual installments beginning in May 1994. The supplier has a
subordinated security interest in the assets of the subsidiary.
At February 29, 1996, other debt consists principally of debt assumed by
the Company in connection with its acquisitions during fiscal 1996. Such debt
was incurred for both working capital and the purchase of capital assets and
includes notes to both individuals and to commercial banks. Debt aggregating
$100,000 to certain individuals at February 29, 1996 is subordinated by the
lenders to the Company's borrowings from the Bank.
- 31 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - DEBT (continued)
Based upon the borrowing rates currently available to the Company for debt
instruments with similar terms and average maturities, the carrying value of
long-term debt approximates fair value.
Future maturities of debt are $579,485 in 1997, $5,449,205 in 1998,
$387,617 in 1999, $195,466 in 2000 and $365,434 in 2001.
5 - LEASE COMMITMENTS
The Company leases warehouse and office equipment and vehicles under
capital leases. Future minimum lease payments under capital leases are as
follows:
<TABLE>
<CAPTION>
Year ending February 28 or 29 Capital lease payments
<S> <C>
1997 $174,920
1998 149,952
1999 120,559
2000 49,345
2001 28,603
--------
Total minimum lease payments 523,379
Less amounts representing interest (82,306)
--------
Present value of future minimum
lease payments 441,073
Less current maturities of
capital lease obligations (135,325)
--------
Long-term obligations under
capital leases $305,748
--------
--------
</TABLE>
Additionally, the Company leases its corporate offices, office and
warehouse space occupied by its HVACR operations, and various office equipment
and vehicles under non-cancelable operating lease agreements that expire at
various dates through 2005. The leases for its HVACR branch operations often
require that the Company pay the taxes, insurance and maintenance expenses
related to the leased properties. Certain of the Company's lease agreements
include renewal and/or purchase options. Future minimum lease payments under
such leases are $1,151,637 in 1997, $1,068,223 in 1998, $630,730 in 1999,
$522,391 in 2000, $333,712 in 2001 and $365,885 after 2001.
Rental expenses were $994,251, $747,353 and $620,718 in 1996, 1995 and
1994, respectively.
- 32 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6 - INCOME TAXES
Effective March 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"). Among other things, SFAS No.
109 requires recognition of a tax benefit from a net operating loss
carryforward if it is more likely than not that such benefit will ultimately
be realized. Such a tax benefit is recorded on the balance sheet as a
deferred tax asset. To the extent that it cannot be determined that such tax
benefit will more likely than not be realized, a valuation allowance must be
established against the deferred tax asset. The deferred tax asset is
classified as current to the extent that a tax benefit is expected to be
realized in the next fiscal period.
The effects of implementing SFAS No. 109 as of March 1, 1993 were to
include $680,000 in net earnings as the cumulative effect on prior periods,
and to record $680,000 as a net deferred tax asset.
Income tax expense consists principally of current state income taxes.
The difference between the income tax provision computed at the statutory
federal income tax rate and the financial statement provision for taxes is
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
FEBRUARY 28,
FEBRUARY 29, -------------------
1996 1995 1994
------------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate $ 67,595 $190,980 $147,583
Increase (reduction) in tax
expense resulting from:
Change in valuation allowance (93,539) (222,501) (169,734)
Nondeductible expenses 39,640 31,521 18,955
Other 1,348 3,500 12,596
------------- -------- --------
Actual income tax expense $ 15,044 $ 3,500 $ 9,400
------------- -------- --------
------------- -------- --------
</TABLE>
As of February 29, 1996 and February 28, 1995, the Company has net
operating loss carryforwards of approximately $34.3 million and $34.9
million, respectively, which are available to offset future taxable income.
If unused, such carryforwards will expire from 2000 to 2007. In addition, as
of February 29, 1996 and February 28, 1995, the Company has investment and
research and development tax credit carryforwards of approximately $1.1
million expiring on various dates through 2000. For financial reporting
purposes, the Company has recognized a valuation allowance of $12.4 million
as of both February 29, 1996 and February 28, 1995, to offset the deferred
tax assets related primarily to the loss
- 33 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6 - INCOME TAXES (continued)
carryforward and the credit carryforwards. The decrease in the valuation
allowance from February 28, 1995 to February 29, 1996 was principally due to
the utilization of net operating loss carryforwards which had previously not
been recognized. There are no other significant components of the Company's
deferred tax assets and liabilities as of February 29, 1996.
7 - STOCK OPTION AGREEMENTS AND EQUITY TRANSACTIONS
Pursuant to an employment contract, the President of the Company may be
entitled to a grant of 125,000 shares and options for up to 425,000 shares of
the Company's common stock based upon attainment in the future of certain
levels of consolidated net income as defined in the contract. The exercise
price of such options will be the market price of the Company's stock at the
time the options are granted. Of such options, 50,000 (25,000 granted in
fiscal 1996) have been awarded at an average exercise price of $.77 per
share. The President also holds options to purchase 325,000 shares at $.49
per share that were granted in connection with the acquisition of ACRS and
expire in February 1998, and options to purchase 24,187 shares at an average
price of $.86 per share which expire from 1996 to 1997. In connection with
its loan to the Company, The Catalyst Fund, Ltd. received a warrant to
purchase one million shares of the Company's common stock at a price of $.59
per share, exercisable at any time before May 1999 (see Note 4).
In March 1994, the Company entered into an employment contract with the
general manager of a subsidiary and concurrently awarded him options to
purchase 25,000 shares of common stock at $.55 per share. Pursuant to his
contract, in fiscal 1996 the Company awarded him options to purchase 15,000
shares at $.70 per share and he may earn options for up to an additional
15,000 shares based on the financial performance of the subsidiary in fiscal
1997.
During fiscal 1994, four current or former directors, including the
President, exercised options granted in 1988 to all non-employee directors at
the time. The number of options exercised aggregated 200,000 at $.25 per
share and 100,000 at $.50 per share. Another current officer and director
exercised options during fiscal 1994 to purchase 270,000 shares at an average
price of $.375, and surrendered 168,750 shares to the Company as
consideration for the aggregate exercise price.
During fiscal 1994, the Company sold 672,969 shares of treasury stock in
a private placement to employees and members of their immediate families at a
price of $.375 per share.
- 34 -
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8 - PROFIT SHARING PLAN
The Company has a qualified profit sharing plan ("Plan") under Section
401(k) of the Internal Revenue Code. The Plan is open to all eligible
employees. The Company matches 50% of the participant's contributions, not
to exceed 3% of each participant's compensation. Company contributions to
the Plan were $94,247, $71,986 and $40,283 for fiscal 1996, 1995 and 1994,
respectively.
- 35 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference.
- 36 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements included in Item 8.
See Index to Financial Statements of ACR Group, Inc. set forth in Item 8,
Financial Statements and Supplementary Data.
(a)(2) Index to Financial Statement Schedules included in Item 14.
The following financial statement schedule for the years ended February 29,
1996 and February 28, 1995 and 1994 is included in this report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denoted by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from,
either (a) Form S-1 Registration Statement under the 1933 Act for Registrant,
Registration No. 2-86049 filed August 24, 1983, as amended by Amendment No. 1
filed September 8, 1983, as amended by Amendment No. 2 (post-effective) filed
September 12, 1984 (referred to as "RS 2-86049"), or (b) Annual Report on
Form 10-K for Fiscal Year Ended June 30, 1991 (referred to as "1991 10-K"),
or (c) Annual Report on Form 10-K for fiscal year ended February 28, 1993
(referred to as "1993 10-K"), or (d) Annual Report on Form 10-K for fiscal
year ended February 28, 1994 (referred to as "1994 10-K"), or (e) Annual
Report on 10-K for fiscal year ended February 28, 1995 (referred to as "1995
Form 10-K").
- 37 -
<PAGE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
* 3.1 Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)
* 3.2 Articles of Amendment to Articles of Incorporation (Exhibit
3.2 to 1993 10-K)
* 3.3 Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)
* 3.4 Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to
1993 10-K)
* 4.1 Specimen of Common Stock Certificate of ACR Group, Inc.
(Exhibit 4.1 to 1993 10-K)
*10.1 Restricted Stock Option Plan, as amended (Exhibit 10.2 to RS
2-86049)
*10.2 Employment Agreement between the Company and Alex Trevino,
Jr. dated May 17, 1993 (Exhibit 10.4 to 1993 10-K)
*10.3 Amendment to Employment Agreement between the Company and
Alex Trevino, Jr. dated as of February 28, 1995 (Exhibit
10.3 to 1995 10-K)
*10.4 Stock Option Agreement between the Company and Alex Trevino,
Jr. dated as of February 28, 1993 (Exhibit 10.11 to 1993
10-K)
*10.5 Note Agreement between The Catalyst Fund, Ltd., as Lender,
and the Company, ACR Supply, Inc., Fabricated Systems, Inc.
and Heating and Cooling Supply, Inc., as Borrowers, dated as
of May 27, 1993 (Exhibit 10.18 to 1993 10-K)
*10.6 Warrant for the Purchase of 1,000,000 Shares of Common Stock
of the Company issued to The Catalyst Fund, Ltd. dated May
27, 1993 (Exhibit 10.19 to 1993 10-K)
*10.7 Registration Rights Agreement between The Catalyst Fund,
Ltd. and the Company dated May 27, 1993 (Exhibit 10.20 to
1993 10-K)
- 38 -
<PAGE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
*10.8 Loan Agreement by and between the Company and NationsBank of
Texas, N.A. dated as of March 8, 1994 (Exhibit 10.11 to 1994
10-K)
*10.9 First Amendment to Loan Agreement by and between the Company
and NationsBank of Texas, N.A. dated as of October 27, 1994
(Exhibit 10.11 to 1995 Form 10-K).
*10.10 Second Amendment to Loan Agreement by and between the
Company and NationsBank of Texas, N.A. dated as of March 27,
1995 (Exhibit 10.12 to 1995 Form 10-K)
10.11 Third Amendment to Loan Agreement by and between the Company
and NationsBank of Texas, N.A. dated as of February 20, 1996
22.1 Subsidiaries of the Company
25.1 Power of Attorney
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period from November 30,
1995 to February 29, 1996.
(c) Exhibits
See Item 14(a)(3), above.
(d) Financial Statement Schedule
- 39 -
<PAGE>
SCHEDULE II
ACR GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND 1994
<TABLE>
<CAPTION>
Additions
-------------------------
Charged
Balance at (Credited) Charged to Balance
Beginning to Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended February 29, 1996:
Allowance for doubtful
accounts:
Accounts receivable $415,455 $326,349 $70,451(2) $352,754(1) $459,501
Year ended February 28, 1995:
Allowance for doubtful
accounts:
Accounts receivable 293,176 218,052 - 95,773(1) 415,455
Year ended February 28, 1994:
Allowance for doubtful
accounts:
Accounts receivable 319,950 128,634 - 155,408(1) 293,176
Notes receivable 2,500 (499) - 2,001(1) -
</TABLE>
(1) Accounts/notes and related allowance written off.
(2) Allowance related to accounts receivable of acquired companies.
- 40 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 28, 1996 By: /S/ ANTHONY R. MARESCA
-------------------------------------
Anthony R. Maresca
Senior Vice President and
Chief Financial Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
/S/ ALEX TREVINO, JR.
- -------------------------- Chairman of the Board, May 24, 1996
Alex Trevino, Jr. President and
Chief Executive Officer
(Principal executive officer)
/S/ ANTHONY R. MARESCA
- -------------------------- Senior Vice President, May 28, 1996
Anthony R. Maresca Chief Financial Officer
and Director
(Principal financial and
accounting officer)
*
- -------------------------- Director May 21, 1996
Thomas W. Courtney
*
- -------------------------- Director May 22, 1996
Herbert E. Stansbury
/S/ Ronald T. Nixon
- -------------------------- Director May 24, 1996
Ronald T. Nixon
*/S/ Anthony R. Maresca
- --------------------------
Anthony R. Maresca
Attorney-In-Fact Pursuant to
Powers Filed with This Report
- 41 -
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
* 3.1 Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)
* 3.2 Articles of Amendment to Articles of Incorporation (Exhibit
3.2 to 1993 10-K)
* 3.3 Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)
* 3.4 Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to
1993 10-K)
* 4.1 Specimen of Common Stock Certificate of ACR Group, Inc.
(Exhibit 4.1 to 1993 10-K)
*10.1 Restricted Stock Option Plan, as amended (Exhibit 10.2 to RS
2-86049)
*10.2 Employment Agreement between the Company and Alex Trevino,
Jr. dated May 17, 1993 (Exhibit 10.4 to 1993 10-K)
*10.3 Amendment to Employment Agreement between the Company and
Alex Trevino, Jr. dated as of February 28, 1995 (Exhibit
10.3 to 1995 10-K)
*10.4 Stock Option Agreement between the Company and Alex Trevino,
Jr. dated as of February 28, 1993 (Exhibit 10.11 to 1993
10-K)
*10.5 Note Agreement between The Catalyst Fund, Ltd., as Lender,
and the Company, ACR Supply, Inc., Fabricated Systems, Inc.
and Heating and Cooling Supply, Inc., as Borrowers, dated as
of May 27, 1993 (Exhibit 10.18 to 1993 10-K)
*10.6 Warrant for the Purchase of 1,000,000 Shares of Common Stock
of the Company issued to The Catalyst Fund, Ltd. dated May
27, 1993 (Exhibit 10.19 to 1993 10-K)
*10.7 Registration Rights Agreement between The Catalyst Fund,
Ltd. and the Company dated May 27, 1993 (Exhibit 10.20 to
1993 10-K)
<PAGE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
*10.8 Loan Agreement by and between the Company and NationsBank of
Texas, N.A. dated as of March 8, 1994 (Exhibit 10.11 to 1994
10-K)
*10.9 First Amendment to Loan Agreement by and between the Company
and NationsBank of Texas, N.A. dated as of October 27, 1994
(Exhibit 10.11 to 1995 Form 10-K).
*10.10 Second Amendment to Loan Agreement by and between the
Company and NationsBank of Texas, N.A. dated as of March 27,
1995 (Exhibit 10.12 to 1995 Form 10-K)
10.11 Third Amendment to Loan Agreement by and between the Company
and NationsBank of Texas, N.A. dated as of February 20, 1996
22.1 Subsidiaries of the Company
25.1 Power of Attorney
*Incorporated by reference
<PAGE>
THIRD AMENDMENT TO LOAN AGREEMENT
THIS THIRD AMENDMENT to Loan Agreement ("Third Amendment") is made and
entered into as of the 20th day of February, 1996, by and between ACR GROUP,
INC., a Texas corporation, with offices and place of business at 3200
Wilcrest, Suite 440, Houston, Texas 77042-6019 (hereinafter called
"Borrower") and NATIONSBANK OF TEXAS, N.A., a national banking association,
with offices and banking quarters at 700 Louisiana, Houston, Texas 77002
(hereinafter called "Lender"). For and in consideration of the mutual
covenants and agreements herein contained, Borrower and Lender hereby amend
as of the date of this Agreement that certain Loan Agreement ("Loan
Agreement") between Borrower and Lender dated the 8th day of March, 1994, as
previously amended by that certain First Amendment to Loan Agreement dated
October 27, 1994, and that certain Second Amendment to Loan Agreement dated
March 27, 1995, in the following respects:
Section 1. AMENDMENTS TO LOAN AGREEMENT.
Section 1.1 is deleted and the following is substituted in its place:
1.1 INDEBTEDNESS. Upon the terms and conditions hereinafter set
forth, the Lender agrees to lend to and/or issue letters of credit for
the account of Borrower in an aggregate of up to $8,000,000.00,
outstanding at any time as evidenced by a Revolving Line of Credit to
be extended to the Borrower by the Lender as more specifically described
in Section 1.3(a) hereof and the Letter of Credit Facility as more
specifically described in Section 1.3(b) hereof, up to $432,000.00
<PAGE>
pursuant to the Pasadena Real Estate Loan as more specifically described
in Section 1.6 hereof, and up to $500,000.00 pursuant to the Equipment
Advance Facility as more specifically described in Section 1.7 hereof.
Section 1.2(a)(9) is deleted and the following is substituted in its
place:
(9) "Commitment Fee" means fees payable by Borrower to
Lender (i) in an amount equal to $6,250.00 payable on March 8,
1994; (ii) in an amount equal to $5,570.00 payable upon
execution of the First Amendment to Loan Agreement; (iii) in an
amount equal to $11,875.00 payable upon execution of the Second
Amendment to Loan Agreement; (iv) in an amount equal to $18,958.33
payable upon execution of the Third Amendment to Loan Agreement for
the commitment of Lender to provide the Revolving Line of Credit;
and (v) on the average daily unused portion of the Revolving Line
of Credit (use shall include the face amount of Credits and the
principal amount of Loans outstanding) from and including the date
of this Agreement to February 28, 1998, at the rate of one-quarter
of one percent (1/4%) per annum based on a 365 or 366 day year as
applicable and the actual number of days elapsed, payable on the
last day of each March, June, September and December, commencing on
March 31, 1994, and on February 28, 1998; and (vi) $1,117.08 upon
execution of the Third Amendment to Loan Agreement for the
commitment of Lender to provide the Equipment Advance Facility.
Section 1.2 (a)(12) is amended by replacing "February 28,
1997" with "February 28, 1998".
Section 1.2(a)(19A) is added to the Agreement as follows:
(19A) "Ener-Tech Subordinated Debt" shall mean the
indebtedness listed on Exhibit "1.2.1" to this Agreement.
-2-
<PAGE>
Section 1.2(a)(23) is amended by adding "Ener-Tech Industries, Inc., a
Tennessee corporation" immediately after Valley Supply, Inc., a Texas
corporation
Section 1.2(a)(29) is amended by replacing "May 31, 1997" with "May 31,
1998",
Section 1.2(a)(33A) is added to the Agreement as follows:
(33A) "Other Eligible Inventory" shall mean inventory which meets
the definition of Eligible Inventory but is not kept at locations set
forth on Exhibit "1.3.3".
Section 1.2(a)(37) is deleted and the following is substituted in its
place:
(37) "Prior Financial Statements" shall mean the audited
consolidated financial statements for the Borrower for the periods ended
February 28, 1993, and February 28, 1994, and February 28, 1995, and as
at such date, as modified and supplemented by Borrower-prepared
financial statements for the period ending November 30, 1995, and as at
such date.
Section 1.2(a)(40) is amended by replacing "$5,000,000" with
"$8,000,000".
Section 1.3 is amended by replacing "February 28, 1997" with "February
28, 1998", by replacing "$5,000,000.00" with "$8,000,000.00" in all
locations $5,000,000 appears in said Section, by replacing "$750,000" in
Section 1.3(b) with "$1,000,000".
Section 1.3(c) is deleted and the following is substituted in its
place:
-3-
<PAGE>
(c) The Borrower's obligation to repay the Credit Facility shall be
evidenced by a promissory note of the Borrower in substantially the form
attached as Exhibit "1.3.2" to the Third Amendment to Loan Agreement,
payable to the order of Lender. The Revolving Note shall bear interest at
the rate set forth in said Revolving Note, not to exceed the maximum
non-usurious interest rate permitted by applicable law with the balance
of principal plus accrued and unpaid interest due and payable on or before
February 28, 1998.
Section 1.4 is deleted and the following is substituted in its place:
1.4 REPAYMENT SCHEDULE. Borrower hereby agrees to pay, and
authorities and directs Lender to collect:
(a) Credit Fees (at the time of the issuance of a Credit) and
the Commitment Fee (at closing and (i) as required pursuant to
Section 1.2(a)(9)(iv) on the last day of each March, June,
September and December, commencing March 30, 1994, and (ii) as
required pursuant to Section 1.2(a)(9)(v) annually on March 31 of
each year), all payable by Borrower by debit to Borrower's
Operating Account No. 266-286-9162 at Lender;
(b) the amount of any drawing under a Credit not otherwise
reimbursed to Lender by advance under the Notes on the earlier of
the LOC Expiration Date by Lender by debit to Borrower's Operating
Account No. 266-286-9162 at Lender or any other of Borrower's
accounts at Lender; and
(c) advances under the Notes (on the maturity of the Notes),
and accrued interest on the advances under the Note (monthly on the
first day of each month and on maturity of the Note); provided,
that all advances under the Notes to reimburse Lender for draws
under any Credit shall be due and payable in full on the maturity
of the Notes; provided further, that all outstanding principal,
together with accrued and unpaid interest, shall be due and
payable in full on or before February 28, 1998, such amounts to be
paid by debit to Borrower's
-4-
<PAGE>
Operating Account No. 266-286-9162 at Lender or any other
of Borrower's accounts at Lender.
Section 1.7 is amended by deleting all references to
"$350,000" and replacing them with "$500,000".
Section 1.7 is amended by adding the following sentence:
Borrower may readvance amounts pursuant to this facility
provided that the outstanding principal balance does not exceed
$500,000 at any time.
Section 3.11 is deleted and the following is substituted in
its place:
3.11 BORROWING BASE. The aggregate indebtedness
pursuant to the Revolving Line of Credit and the amount of
outstanding Credits shall never exceed the Borrowing Base. The
Borrowing Base is the sum of (x) eighty percent (80%) of Eligible
Accounts PLUS (y) fifty percent (50%) of Eligible Inventory, PLUS
(2) twenty-five percent (25%) of Other Eligible Inventory, provided
that amount of the Borrowing Base based upon fifty percent (50%) of
Eligible Inventory PLUS twenty-five percent (25%) of Other Eligible
Inventory shall not exceed the amount of the Borrowing Base based
upon eighty percent (80%) of the Eligible Accounts. In accordance
with Section 3.1(d), Borrower shall provide the Lender a
calculation of the foregoing Borrowing Base on the Borrowing Base
Report. In the event, at any time, the aggregate unpaid principal
balance of Loans plus the outstanding Credits exceeds the Borrowing
Base calculated as described above, the Borrower will promptly, but
in any event no later the next Business Day, reduce the
indebtedness under the Revolving Line of Credit until the amount
owed is less than that calculated as described above.
Section 4.7 is deleted and the following is substituted in its
place:
4.7 FINANCIAL COVENANTS. The Borrower will not at any
time permit:
-5-
<PAGE>
(a) its Maximum Leverage Ratio to be greater than (i)
3.50 up to 1.0 and (ii) 2.75 to 1.00 as of the end of the fiscal
quarters ending February 28 and November 30, excluding from Debt of
the Borrower for the purposes of this calculation any payable
incurred to acquire inventory which is due by its terms more than
60 days after February 28 and November 30;
(b) its Minimum Debt Coverage Ratio to be less than 1.25
to 1.0; and
(c) its Tangible Net Worth plus the Catalyst Debt plus
the Ener-Tech Subordinated Debt to be less than (i) $4,500,000
prior to and as of February 28, 1996, and (ii) $4,500,000 plus
seventy-five percent (75%) of positive net income of the Borrower
earned after February 28, 1996.
All terms not expressly defined shall be defined in accordance
with generally accepted accounting principles. All determinations
under this Agreement shall be made in accordance with generally
accepted accounting principles consistently applied, on a
consolidated basis, except where expressly provided to the
contrary. All references to a preceding period shall mean the
period ending as of the end of the month, quarter or fiscal year
for which the applicable report is delivered. All references to a
period immediately following shall mean the period beginning on the
first day of the month, quarter or fiscal year following the end of
the period for which the applicable report is delivered.
Section 7.17 is added as follows:
7.17 ENER-TECH COLLATERAL. Borrower agrees that accounts and
inventory owned by Ener-Tech Industries, Inc., a Tennessee
corporation, shall not constitute Eligible Inventory or Eligible
Other Inventory until such time as Lender has determined, in its
sole and absolute discretion, that Lender holds a first and prior
security interest in such accounts and inventory.
-6-
<PAGE>
Exhibit 1.3.2 is deleted and the attached Exhibit 1.3.2
is substituted in its place.
Exhibit 1.3.3 is deleted and the attached Exhibit 1.3.3 is
substituted in its place.
Exhibit 3.8 is deleted and the attached Exhibit 3.8 is
substituted in its place.
Exhibit 3.11 is deleted and the attached Exhibit 3.11 is
substituted in its place.
Section 2. CLOSING.
The closing of the transactions contemplated by this Amendment
is subject to the satisfaction of the following conditions.
2.1 COUNSEL TO LENDER. All legal matters incident to the
transactions herein contemplated shall be satisfactory to Gardere
Wynne Sewell & Riggs, LLP, counsel to the Lender.
2.2 REQUIRED DOCUMENTS.
(a) The Lender shall have received certified copies of
resolutions of the Board of Directors of the Borrower in form and
substance satisfactory to Lender with respect to authorization of
this Amendment, the Revolving Note, the Security Instruments and
the other corporate instruments provided for herein.
(b) The Lender shall have received a certificate of the
Secretary of the Borrower of the names of officers of the Borrower
to sign this Amendment, the Revolving Note, the Security Instru-
-7-
<PAGE>
ments and the other instruments or certificates related hereto
together with the true signatures of such officers.
(c) The Lender shall have received fully executed copies of
this Amendment and the documents indicated on Exhibit "2.2"
attached hereto and made a part hereof.
2.3 OPINION OF COUNSEL. The Lender shall have received from
Robert D. Remy, counsel to the Borrower, a written opinion,
satisfactory to the Lender and its counsel.
Section 3. RATIFICATION.
Except as amended hereby, the Loan Agreement shall remain
unchanged and the terms, conditions, representations, warranties,
and covenants of said Loan Agreement and the Security Instruments
are true as of the date hereof, are ratified and confirmed in all
respects and shall be continuing and binding upon the parties.
Section 4. DEFINED TERMS.
All terms used in this Amendment which are defined in the Loan
Agreement shall have the same meaning as in the Loan Agreement,
except as otherwise indicated in this Amendment.
Section 5. MULTIPLE COUNTERPARTS.
This Amendment may be executed by the parties hereto in
several separate counterparts, each of which shall be an original
and all of which taken together shall constitute one and the same
agreement.
-8-
<PAGE>
Section 6. APPLICABLE LAW.
This Amendment shall be deemed to be a contract under and
subject to, and shall be construed for all purposes in accordance
with the laws of the State of Texas.
Section 7. FINAL AGREEMENT.
THE WRITTEN LOAN AGREEMENTS IN CONNECTION WITH THIS THIRD
AMENDMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE BORROWER AND
THE LENDER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE BORROWER AND
THE LENDER. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
LENDER AND THE BORROWER.
IN WITNESS WHEREOF, the parties have caused this Amendment to
be executed by their duly authorized officers as of the 20th day of
February, 1996.
ACR GROUP, INC., a Texas corporation
By: /s/ Alex Trevino, Jr.
__________________________________
Alex Trevino, Jr.
Chairman of the Board and
President
NATIONSBANK OF TEXAS, N.A.
By: /s/ James D. Racer
__________________________________
James D. Racer
Vice President
-9-
<PAGE>
Exhibit 1.2.1
ENER-TECH SUBORDINATED DEBT
Original Principal
Maker Payee Amount of Note
----- ----- ------------------
ACR Group, Inc. Robert J. Pfleiger $145,894.40
ACR Group, Inc. Jerome B. Neal 109,420.80
ACR Group, Inc. Malcolm V. Lyell 36,473.60
Ener-Tech Industries, Inc. Robert J. Pfleiger 13,000.00
Ener-Tech Industries, Inc. Jerome B. Neal 32,000.00
Ener-Tech Industries, Inc. W. D. Miller 15,000.00
Ener-Tech Industries, Inc. John Hoff 40,000.00
<PAGE>
EXHIBIT "1.3.2"
REVOLVING NOTE
P R O M I S S O R Y N O T E
$8,000,000.00 February 20, 1996
FOR VALUE RECEIVED, after date, without grace, in the manner,
on the dates and in the amounts so herein stipulated, the
undersigned, ACR GROUP, INC., acting by and through its duly
authorized officer, ("Borrower"), PROMISES TO PAY TO THE ORDER OF
NATIONSBANK OF TEXAS, N.A. ("Lender"), in Houston, Harris County,
Texas, the sum of EIGHT MILLION AND NO/100 DOLLARS ($8,000,000.00)
or, if less, the aggregate unpaid principal amount of advances made
by Lender to Borrower pursuant to this Note, in lawful money of the
United States of America, which shall be legal tender in payment of
all debts and dues, public and private, at the time of payment, and
to pay interest on the unpaid principal amount from date until
maturity at a rate equal to the Stated Rate (hereinafter defined),
not to exceed the maximum non-usurious interest rate permitted by
applicable law from time to time in effect as such law may be
interpreted, amended, revised, supplemented or enacted ("Maximum
Rate"), provided that if any any time the Stated Rate exceeds the
Maximum Rate then interest hereon shall accrue at the Maximum Rate. In the
event the Stated Rate subsequently decreases to a level which would be less
than the Maximum Rate or if the Maximum Rate applicable to this Note should
subsequently be changed, then interest hereon shall accrue at a rate equal to
the applicable Maximum Rate until the aggregate amount of interest so accrued
equals the aggregate amount of interest which would have accrued at
the Stated Rate without regard to any usury limit, at which time
interest hereon shall again accrue at the Stated Rate. This Note is
payable as follows:
Interest shall be due and payable monthly as it accrues,
on the last day of each and every month, beginning February 29,
1996, and continuing regularly thereafter until February 28, 1998,
when the entire balance of principal and accrued interest shall be
due and payable.
It is agreed that time is of the essence of this agreement. In
the event of default in the payment of any installment of principal
or interest when due or in the event of any other default
hereunder, Lender may accelerate and declare this Note immediately
due and payable without notice. Any failure to exercise this option
shall not constitute a waiver by Lender of the right to exercise
the same at any other time.
In the event of default in the making of any payment herein
provided, either of principal or interest, or in the event this
Note is declared due, interest shall accrue at the Maximum Rate.
<PAGE>
As used herein, the Stated Rate shall mean:
Applicable Minimum
Net Income Before Taxes Stated Rate
- --------------------------- -----------
Borrower's consolidated net income Prime Rate + 1.00%
before taxes for the preceding four
fiscal quarters is less than $750,000
Borrower's consolidated net income Prime Rate + .50%
before taxes for the preceding four
fiscal quarters is equal to or greater
than $750,000.
As used in this Note, the term "Prime Rate" shall mean the
variable rate of interest announced by Lender from time to time as
its prime rate of interest and, without notice to the maker of this
Note or any other person, such rate of interest shall change as and
when changes in that prime rate of interest are announced. The
Prime Rate is set by Lender as a general reference rate of
interest, taking into account such factors as Lender may deem
appropriate, it being understood that many of Lender's commercial or
other loans are priced in relation to such rate, that it is not
necessarily the lowest or best rate of interest actually charged on
any loan, and that Lender may make various commercial or other
loans at rates of interest having no relationship to the Prime
Rate. If at any time the "Prime Rate" of Lender is not longer
available, then the owner of this Note ("Owner") will designate a
difference "Prime Rate" as announced by a national banking
association of Owner's choice.
Borrower hereby agrees to pay all expenses incurred, including
reasonable attorney's fees, all of which shall become a part of the
principal hereof, if this Note is placed in the hands of an
attorney for collection or if collected by suit or through any probate,
bankruptcy or any other legal proceedings.
Interest charges will be calculated on amounts advanced
hereunder on the actual number of days these amounts are
outstanding on the basis of a 360-day year, except for calculations
of the Maximum Rate which will be on the basis of a 365-day or
366-day year, as is applicable. It is the intention of the parties
hereto to comply with all applicable usury laws; accordingly, it
is agreed that notwithstanding any provision to the contrary in
this Note, or in any of the documents securing payment hereof or
otherwise relating hereto, no such provision shall require the payment or
permit the collection of interest in excess of the Maximum Rate.
If any excess of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in this Note or in any of the
documents securing payment hereof or otherwise relating hereto, then in
such event (1) the provisions of this paragraph shall govern and control,
(2) neither Borrower, endorsers or guarantors,
- ------------
Initials
<PAGE>
nor their heirs, legal representatives, successors or assigns nor any other
party liable for the payment hereof, shall be obligated to pay the amount of
such interest to the extent that it is in excess of the Maximum Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount hereof or refunded to
Borrower, and (4) the provisions of this Note and any documents securing
payment of this Note shall be automatically reformed so that the effective
rate of interest shall be reduced to the Maximum Rate. For the purpose of
determining the Maximum Rate, all interest payments with respect to this
Note shall be amortized, prorated and spread throughout the full term of
the Note so that the effective rate of interest on account of this Note is
uniform throughout the term hereof.
Borrower agrees that the Maximum Rate to be charged or collected
pursuant to this Note shall be the applicable indicated rate ceiling as
defined in TEX. REV. CIV. STAT. ANN. Art. 5069-1.04, provided that Lender
may rely on other applicable laws, including without limitation laws of
the United States, for calculation of the Maximum Rate if the application
thereof results in a greater Maximum Rate. Except as provided above, the
provisions of this Note shall be governed by the laws of the State of Texas.
Each maker, surety, guarantor and endorser (i) waives demand, grace,
notice, presentment for payment, notice of intention to accelerate the
maturity hereof, notice of acceleration of the maturity hereof and protest,
(ii) agrees that this Note and the liens securing its payment may be
renewed, and the time of payment extended from time to time, without
notice and without releasing any of the foregoing, and (iii) agrees that
without notice or consent from any maker, surety, guarantor, or endorser,
Lender may release any collateral which may from time to time be pledged to
secure repayment of this Note, or may release any party who might be liable
for this Note. Borrower grants to Lender a lien on any of Borrower's funds
which may from time to time be deposited with Lender.
Borrower may prepay this Note, in whole or in part, at any time prior
to maturity without penalty, and interest shall cease on any amount
prepaid. Any partial prepayment shall be applied toward the payment of the
principal installments last maturing on the Note, that is, in the inverse
order of maturity, without reducing the amount or time of payment of the
remaining installments.
The principal of this Note represents funds which Lender will advance
to Borrower from time to time upon request of Borrower. Any part of the
principal may be repaid by Borrower and thereafter reborrowed, provided the
outstanding principal amount of this Note shall never exceed the face
amount of this Note. Each advance shall constitute a part of the principal
hereof and shall bear
- --------
Initials -3-
<PAGE>
interest from the date of the advance. The provisions of Tex. Rev. Civ. Stat.
Ann. art. 5069-15.01, ET SEQ., as may be amended, shall not apply to this Note
or to any of the security documents executed in connection with this Note.
This Note is the Revolving Note referred to in, is subject to, and is
entitled to the benefits of the Third Amendment to Loan Agreement of even
date herewith between Borrower and Lender amending that certain Loan
Agreement dated March 8, 1994, as that Loan Agreement was amended by the
First Amendment to Loan Agreement dated October 27, 1994 and the Second
Amendment to Loan Agreement dated March 27, 1995 and may be further
amended, modified or supplemented from time to time (the "Loan Agreement").
The Loan Agreement contains, among other things, provisions for the
acceleration of the maturity hereof upon the occurrence of certain stated
events.
This Note is entitled to the benefits of and security afforded by (i) a
Ratification of Security Agreement of even date herewith executed by ACR
Supply, Inc., Heating and Cooling Supply, Inc., and Total Supply, Inc.,
(ii) a Ratification of Security Agreement of even date herewith executed
by Valley Supply, Inc., (iii) a Ratification of Continuing Guaranty of even
date herewith executed by ACR Supply, Inc., Heating and Cooling Supply,
Inc., and Total Supply, Inc., (iv) a Ratification of Continuing Guaranty of
even date herewith executed by Valley Supply, Inc., (v) a Ratification of
Security Agreement of even date herewith executed by ACR Group, Inc., (vi)
a Deed of Trust, Security Agreement and Assignment of Leases and Rents
dated October 27, 1994, (vi) a Security Agreement of Ener-Tech Industries,
Inc. of even date herewith, and (vii) a Continuing Guaranty of Ener-Tech
Industries of even date herewith. This Note is subject to the provisions
contained in the foregoing security instruments which, among other things,
provide for acceleration of the maturity hereof upon the occurrence of
certain events.
Borrower represents and warrants that this loan is for business,
commercial, investment or similar purposes and not primarily for personal,
family, household or agricultural use, as such terms are used in Chapter
One of the Texas Credit Code.
ACR GROUP, INC., a Texas
corporation
By:
----------------------------------------------
Alex Trevino, Jr.
Chairman of the Board and President
"BORROWER"
- ---------
Initials -4-
<PAGE>
Exhibit "1.3.3"
ELIGIBLE INVENTORY LOCATIONS
8978 Westpark Drive 4744 Center Park Blvd.
Houston, Texas 77063 Suite 101
San Antonio, Texas 78218
806 East Harris
Pasadena, Texas 77506 4525 South Pinemont
Suite 100
3924 Dunvale Houston, Texas 77041
Houston, Texas 77063
108 East Highway Business 83
722 S. Padre Island Drive McAllen, Texas 78501
Corpus Christi, Texas 78416
9324 Neils Thompson Drive
Suite 101
Austin, Texas 78758
5312 Franklin Avenue
Waco, Texas 76710
747 Kenrick
Suite 124
Houston, Texas 77060
1700 Buchanan
Brenham, Texas 77833
705 Cedar Bayou Road
Baytown, Texas 77520
2402 South 57th Street
Temple, Texas 76504
<PAGE>
EXHIBIT "3.8"
CERTIFICATE OF COMPLIANCE
In accordance with Section 3.8 of the Loan Agreement, as
amended ("Loan Agreement") dated March 8, 1994, between NationsBank
of Texas, N.A. ("Lender") and ACR Group, Inc. ("Borrower"), I, ______
_______________________, ___________________, of the Borrower do
hereby certify that the following is true and correct as of
______________________, 19____.
1. To the best of my knowledge and belief, that the Borrower
and its Subsidiaries are not in default under the Loan Agreement,
the Notes, and the Security Instruments.
2. That the Borrower's financial condition for the month
ending _______________________ is as follows:
FINANCIAL REQUIRED RATIO/ ACTUAL
RATIO/
COVENANT AMOUNT AMOUNT
- --------- -------------- ------
Maximum Leverage Ratio not to exceed 3.5 to 1.0
Maximum Leverage Ratio not to exceed 2.75 to 1.0
for quarters ending February 28 and
November 30 with adjusted definition of Debt
Minimum Debt Coverage Ratio not less than
1.25 to 1.0
Minimum Tangible Net Worth not less than
$4,500,000 plus 75% of positive net
income after February 28, 1996
Collateral Location:
All inventory of Borrower and its Subsidiaries is located
in the following states and no other states:
ACR Group, Inc.-Texas
ACR Supply, Inc.-Texas and Louisiana
Heating and Cooling Supply, Inc.-Nevada
Total Supply, Inc.-Georgia
Valley Supply, Inc. - Tennesee
Ener-Tech Industries, Inc. - Tennessee
The foregoing terms are used as defined in the Loan Agreement.
____________________________________
(Signature of Certifying Officer)
<PAGE>
EXHIBIT "3.11"
BORROWING BASE REPORT
FORM OF
BORROWING BASE CERTIFICATE
NO. Dated , 19
------------------------- -------------- --
In accordance with a loan agreement, as amended ("Agreement") dated
March 8, 1994 between NationsBank of Texas, N.A. ("Lender") and ACR Group,
Inc. ("Borrower"), I, of the Borrower hereby
---------------------------
certify and warrant that the following schedule accurately states Borrower's
Eligible Accounts and Eligible Inventory and Borrower's borrowing base as of
the date hereof:
A. Eligible Accounts x 80% =
-------- -------------------------
B. Eligible Inventory -------- x 50% = -------------------------
C. Other Eligible Inventory -------- x 25% = -------------------------
D. Sum of B plus C -------------------------
(not to exceed Line A)
E. Borrowing Base = -------------------------
F. Availability:
1. Maximum Credit Facility Commitment = $8,000,000.00
2. Borrowing Base (from E above) = -------------------------
3. Lesser of Borrowing Base or
Credit Facility Commitment = -------------------------
4. Total Loans Outstanding = -------------------------
5. Total Credits Outstanding = -------------------------
6. Total Outstandings (sum of
F.4. plus F.5. above) = -------------------------
7. Net Availability
(F.3. minus F.6. above) = -------------------------
The Undersigned further certifies and covenants that there has been no
material adverse change in the financial condition of Borrower from that
shown by the financial statements furnished to Lender and to the best of his
knowledge that no default under the Agreement is existing on the date of this
certificate, and that the foregoing report is true and correct as of the
date, and that the items mentioned herein constitute collateral in accordance
with the terms of the Agreement.
----------------------------------
Signature of Certifying Officer
Title: ---------------------------
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
The companies listed below are all of the subsidiaries of ACR Group, Inc. as
of February 29, 1996. All of the companies are wholly-owned.
Name of Subsidiary State of Incorporation
------------------------------------- ----------------------
ACR Supply, Inc. Texas
Total Supply, Inc. Texas
Valley Supply, Inc. Texas
Heating and Cooling Supply, Inc. Nevada
Time Energy Systems Southwest, Inc. Texas
Ener-Tech Industries, Inc. Tennessee
Florida Cooling Supply, Inc. Texas
Sunbelt Warranty, Inc. Texas
<PAGE>
POWER OF ATTORNEY
STATE OF CALIFORNIA ]
----------
]
COUNTY OF SAN FRANCISCO ]
-------------
KNOW ALL MEN BY THESE PRESENTS, that I, Herbert E. Stansbury, Jr.,
Director of ACR Group, Inc., a Texas corporation, do constitute and appoint
Alex Trevino, Jr. and Anthony R. Maresea, jointly and severally, my true and
lawful attorneys-in-fact, each with full power of substitution, for me in any
and all capacities, to sign pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for
the fiscal year of the Corporation ended February 29, 1996, and to file the
same with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, including such as are
incorporated therein by reference, and to sign on my behalf and in my stead,
in any and all capacities, any amendments to said Annual Report,
incorporating such changes as any of said attorneys-in-fact deem appropriate,
hereby ratifying and confirming all that said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22 day
--
of May, 1996.
---
/s/ Herbert E. Stansbury, Jr.
-----------------------------
Herbert E. Stansbury, Jr.
ACKNOWLEDGEMENT
STATE OF CALIFORNIA ]
----------
]
COUNTY OF SAN FRANCISCO ]
-------------
This instrument was acknowledged before me on May 22, 1996, by Herbert E.
------
Stansbury, Jr.
/s/ Harriet R. O'Donnell
-----------------------------
Notary Public in and for the
State of California
<PAGE>
POWER OF ATTORNEY
STATE OF PENNSYLVANIA ]
------------
]
COUNTY OF ALLEGHENY ]
---------
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas W. Courtney, Director of
ACR Group, Inc., a Texas corporation, do constitute and appoint Alex Trevino,
Jr. and Anthony R. Maresea, jointly and severally, my true and lawful
attorneys-in-fact, each with full power of substitution, for me in any
and all capacities, to sign pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for
the fiscal year of the Corporation ended February 29, 1996, and to file the
same with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, including such as are
incorporated therein by reference, and to sign on my behalf and in my stead,
in any and all capacities, any amendments to said Annual Report,
incorporating such changes as any of said attorneys-in-fact deem appropriate,
hereby ratifying and confirming all that said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 21st day
----
of May, 1996.
---
/s/ Thomas W. Courtney
-----------------------------
Thomas W. Courtney
ACKNOWLEDGEMENT
STATE OF PENNSYLVANIA ]
------------
]
COUNTY OF ALLEGHENY ]
---------
This instrument was acknowledged before me on May 21, 1996, by Thomas W.
------
Courtney.
/s/ Judith K. Rofett
-----------------------------
Notary Public in and for the
State of Pennsylvania
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 348,162
<SECURITIES> 0
<RECEIVABLES> 7,648,340
<ALLOWANCES> 459,501
<INVENTORY> 9,934,637
<CURRENT-ASSETS> 17,758,665
<PP&E> 3,581,785
<DEPRECIATION> 1,470,788
<TOTAL-ASSETS> 22,010,286
<CURRENT-LIABILITIES> 9,640,604
<BONDS> 0
0
0
<COMMON> 102,466
<OTHER-SE> 5,563,746
<TOTAL-LIABILITY-AND-EQUITY> 22,010,286
<SALES> 56,500,253
<TOTAL-REVENUES> 0
<CGS> 45,779,447
<TOTAL-COSTS> 45,779,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 326,349
<INTEREST-EXPENSE> 644,767
<INCOME-PRETAX> 198,810
<INCOME-TAX> 15,044
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 183,766
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
