<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-12490
ACR GROUP, INC.
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(Exact name of registrant as specified in its charter)
Texas 74-2008473
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Wilcrest Drive, Suite 440, Houston, Texas 77042
- ---------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(713) 780-8532
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Shares of Common Stock outstanding at December 31, 1996 - 10,371,555.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, February 29,
1996 1996
----------- ------------
(Unaudited)
Current assets:
Cash $ 262,075 $ 348,162
Accounts receivable, net 9,927,999 7,188,839
Inventory 10,765,929 9,934,637
Prepaid expenses and other 133,677 151,027
Deferred income taxes 136,000 136,000
----------- -----------
Total current assets 21,225,680 17,758,665
----------- -----------
Property and equipment, net of accumulated
depreciation 2,820,737 2,110,997
Deferred income taxes 544,000 544,000
Goodwill, net of accumulated amortization 1,433,601 1,470,665
Other assets 293,312 125,959
----------- -----------
$26,317,330 $22,010,286
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,081,103 $ 714,810
Accounts payable 7,872,970 8,377,600
Accrued expenses and other liabilities 1,184,372 548,194
----------- -----------
Total current liabilities 10,138,445 9,640,604
Long-term debt, less current maturities 9,124,484 6,703,470
----------- -----------
Total liabilities 19,262,929 16,344,074
----------- -----------
Shareholders' equity:
Common stock 103,716 102,466
Additional paid-in capital 41,550,770 41,427,020
Accumulated deficit (34,600,085) (35,863,274)
----------- -----------
Total shareholders' equity 7,054,401 5,666,212
----------- -----------
$26,317,330 $22,010,286
----------- -----------
----------- -----------
The accompanying notes are an integral part
of these condensed financial statements.
-1-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Three months ended
November 30, November 30,
------------------------- -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $62,911,596 $43,540,915 $18,881,914 $13,957,393
Cost of sales 50,792,694 35,290,889 15,252,623 11,398,089
----------- ----------- ----------- -----------
Gross profit 12,118,902 8,250,026 3,629,291 2,559,304
Selling, general and
administrative expenses (10,569,431) (7,279,767) (3,307,439) (2,495,403)
Other operating income 337,941 111,649 80,782 22,512
----------- ----------- ----------- -----------
Operating income 1,887,412 1,081,908 402,634 86,413
Interest expense (675,073) (476,075) (235,013) (177,428)
Other non-operating income 96,359 52,565 24,322 18,917
----------- ----------- ----------- -----------
Income (loss) before taxes 1,308,698 658,398 191,943 (72,098)
Provision for income taxes (45,509) (15,932) (13,669) (8,432)
----------- ----------- ----------- -----------
Net income (loss) $ 1,263,189 $ 642,466 $ 178,274 $ (80,530)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average outstanding common
and equivalent shares 10,957,049 10,573,296 11,206,003 10,529,069
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per share $ .12 $ .06 $ .02 $ (.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
2
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months ended
November 30,
-------------------------
1996 1995
---------- -----------
Operating activities:
Net income $1,263,189 $ 642,466
Adjustments to reconcile net income
to net cash (used in) operating
activities:
Depreciation and amortization 511,712 393,636
Compensation from stock grant 125,000
Increase (decrease) from changes in:
Accounts receivable (2,739,160) (2,022,239)
Inventory (831,292) 729,669
Prepaid expense and other assets (170,385) 216,076
Accounts payable (504,630) (891,087)
Accrued expenses and other liabilities 636,178 193,799
---------- -----------
Net cash used in operating activities (1,709,388) (737,680)
---------- -----------
Investing activities:
Acquisition of property and equipment, net (538,713) (759,968)
Payments to seller and for acquisition costs
in excess of cash acquired (35,000)
---------- -----------
Net cash used in investing activities (538,713) (794,968)
---------- -----------
Financing activities:
Proceeds from borrowings 2,701,862 2,445,019
Repayment of debt (539,848) (705,321)
---------- -----------
Net cash provided by financing activities 2,162,014 1,739,698
---------- -----------
Net increase (decrease) in cash (86,087) 207,050
Cash at beginning of year 348,162 162,745
---------- -----------
Cash at end of period $ 262,075 $ 369,795
---------- -----------
---------- -----------
Schedule of non-cash investing and
financing activities:
Purchase of property and equipment
(net of cash paid):
For notes payable $ 250,000 $ -0-
Under capital leases 375,293 228,255
Acquisition of subsidiary:
Liabilities in excess of assets acquired 31,436
Goodwill 96,437
Note payable to seller 30,000
The accompanying notes are an integral part
of these condensed financial statements.
-3-
<PAGE>
ACR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 - BASIS OF PRESENTATION
The interim financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normally
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. Certain balances in the 1995
financial statements have been reclassified to conform to the 1996 presentation.
The results of operations for the three and nine-month periods ended November
30, 1996 are not necessarily indicative of the results to be expected for the
full year.
All inventories represent finished goods held for sale.
2 - CONTINGENT LIABILITIES
The Company has an arrangement with an HVACR equipment manufacturer and a
field warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of the Company's operations in Georgia, Las
Vegas and Memphis, with payment due only when products are sold. Such inventory
is accounted for as consigned merchandise and is not recorded on the Company's
balance sheet. As of November 30, 1996, the cost of such inventory held in the
bonded warehouses was $11,912,084.
The terms of the consignment agreement with the supplier further provide
that merchandise not sold within a specified period of time must be purchased by
the Company. The Company believes that substantially all consigned merchandise
will be sold in the ordinary course of business before any purchase obligation
is incurred.
3 - INCOME TAXES
The provision for income taxes consists of alternative minimum federal
income taxes and state income taxes. Federal income taxes on taxable income are
substantially offset by the benefit of the Company's net operating loss and tax
credit carryforwards.
-4-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE-MONTH AND THREE-MONTH PERIODS
ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995
NINE-MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995
Net income increased to $1,263,189 for the nine months ended November 30,
1996 (fiscal 1997), compared to $642,466 for the nine months ended November 30,
1995 (fiscal 1996), an increase of 97%. The improved results of operations were
generally attributable to increased operating income at ACR Supply, Inc.
("ACRS") and at Heating and Cooling Supply, Inc. ("HCS"), both of which reflect
fiscal 1997 earnings that are more than double earnings for the first nine
months of fiscal 1996. The Company's enhanced operating results from existing
branch operations enabled the Company to more than offset operating losses
related to the five branch operations opened during the first quarter of fiscal
1997. Such losses, which were approximately $375,000 during the nine month
period ended November 30, 1996, are expected by the Company during the initial
months after opening a branch, but have been exacerbated during fiscal 1997 by
lower than expected sales at Florida Cooling Supply, Inc. ("FCS") which was
opened in April 1996.
Consolidated sales increased 44% from fiscal 1996 to 1997. Sales at
branches opened or acquired after the second quarter of fiscal 1996 accounted
for 57% of this increase. Of 16 branches that had been open more than a year at
the beginning of fiscal 1996, 13 experienced a gain in sales for the first nine
months of fiscal 1997, with the average increase equal to 19%. Sales at HCS
increased 39% from fiscal 1996 to 1997, as the Las Vegas economy continued its
phenomenal growth. In addition, HCS's sales of Janitrol equipment, which is
used principally in the residential market, increased 84% from fiscal 1996 to
1997. Sales at ACRS increased 22% from fiscal 1996 to 1997 although there were
no additional branches of ACRS opened in fiscal 1997.
The Company's gross margin percentage on sales increased from 18.9% in
fiscal 1996 to 19.3% in fiscal 1997, reversing a downward trend of the previous
three years. The gross margin percentage attained by Ener-Tech Industries, Inc.
("ETI"), which was acquired in January 1996, and by FCS, which was started in
fiscal 1997, exceed the Company's average and offset the comparatively lower
gross margin percentage experienced at HCS, Total Supply, Inc. ("TSI") and
Valley Supply, Inc. ("VSI"), all of which have a large volume of low-margin
equipment in its sales mix. In addition, the gross margin percentage at ACRS
has increased during fiscal 1997 as a result of management's effort to reduce
net product costs.
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE-MONTH AND THREE-MONTH PERIODS
ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995 (continued)
NINE-MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995 (continued)
Selling, general and administrative ("SG&A") expenses have increased 45%
from fiscal 1996 to 1997, and expressed as a percentage of sales, such expenses
have increased from 16.7% in fiscal 1996 to 16.8% in fiscal 1997. The increase
in SG&A expenses as a percentage of sales is attributable to a non-recurring
charge of $125,000 recorded in the second quarter of fiscal 1997 for
performance-based compensation pursuant to an employment contract. Generally,
the Company expects SG&A expenses to decline as a percentage of sales as the
volume of sales increases. However, SG&A expenses as a percentage of sales are
unusually high during the first year of new branch operations as sales volume
gradually increases to expected levels.
Beginning in fiscal 1997, the Company has earned revenue from a supplier by
providing warehousing and shipping services to another distributor of the
supplier. Such revenue comprises the majority of net other operating income
reflected in the statement of operations. This arrangement was modified by the
supplier in January 1997 such that calendar 1997 revenues will be earned at a
rate approximately equal to 70% of the rate in calendar 1996. Net other
operating income also includes energy services income which has declined
slightly in fiscal 1997 from fiscal 1996. Although all of the Company's energy
services contracts have expired, the Company continues to provide services on a
month-to-month basis to a single customer with twelve facilities. Management
cannot estimate how long such an informal arrangement may continue.
Interest expense increased 42% from fiscal 1996 to fiscal 1997, and
increased from 1.0% to 1.1% of sales. The higher level of interest expense has
resulted from greater borrowings necessary to provide the working capital to
support the Company's sales growth rate.
The Company incurs minimal income tax expense because of its substantial
net operating loss carryforwards. Income tax expense includes a provision for
certain state income taxes. See Liquidity and Capital Resources, below.
During the third quarter of fiscal 1997, management obtained the
distribution rights for a line of HVACR equipment to be sold at FCS. The
equipment is manufactured by the supplier of HVACR equipment to ACRS.
Management expects that the availability of a broad line of equipment will
accelerate the sales growth rate of FCS. The Company has opened a branch of ETI
in Memphis, where it is located in the same facility as a branch of VSI, which
is based in Memphis. Management believes that many of VSI's customers will also
purchase the products distributed by ETI, which generally consist of building
controls and control systems. Conversely, management also believes that
customers that seek to purchase certain building controls that are distributed
exclusively by ETI will also purchase other heating and air conditioning
products sold by VSI.
-6-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE-MONTH AND THREE-MONTH PERIODS
ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995 (continued)
THREE-MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995
Much of the preceding analysis with respect to the nine month periods
ended November 30, 1996 and 1995 is applicable to the three month periods
then ended. Net income in the quarter ended November 30, 1996 was $178,274,
compared to a loss of $(80,530) in the third quarter of fiscal 1996.
Operating losses declined during the third quarter at both ETI and FCS, as
marketing efforts at both companies began to generate positive results. In
addition, contrary to the seasonality of the Company's other operations, ETI
traditionally generates greater sales during the cooler seasons of the year.
The building controls which comprise substantially all of ETI's products are
used predominantly in gas heating applications.
At the end of October 1996, the Company closed one of its FCS branch
operations pursuant to the settlement terms of litigation that was initiated
by another HVACR distributor in Florida. Costs associated with closing the
branch were not material.
Consolidated sales increased 35% from 1995 to 1996, with sales at ACRS,
TSI, HCS and VSI increasing 15%, 34%, 15% and 54%, respectively.
Contributing to the increase in TSI's and VSI's sales compared to 1995 are
new branch operations that have been opened since the second quarter of
fiscal 1996.
For the reasons stated above, gross margin percentage in the quarter
ended November 30, 1996 was 19.2%, compared to 18.3% in the same quarter in
1995.
SG&A expenses as a percentage of sales declined from 17.9% in 1995 to
17.5% in 1996, as a result of the growth in sales at ETI and FCS. Interest
expense as a percentage of sales declined from 1.3% in 1995 to 1.2% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $8,118,000 at February 29, 1996 to
$11,087,000 at November 30, 1996, as a result of the Company's increased
operations and additional borrowings of long-term debt. Gross receivables
represented 52 days of sales at November 30, 1996, compared to 50 days at
November 30, 1995, reflecting more liberal payment terms that the Company has
granted certain large customers during fiscal 1997.
-7-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
At November 30, 1996, the Company had fully utilized the borrowings
available under its bank line of credit. The Company's outstanding
borrowings under its credit line were $7.4 million at November 30, compared
to $4.9 million at February 29, 1996. At November 30, 1996, the Company
obtained a waiver of a certain covenant in its loan agreement with its
principal secured lender. The Company expects to be in compliance with all
covenants as of February 28, 1997. Management does not believe that the lack
of borrowing capacity under its bank line of credit will impair the Company's
existing operations. Management expects to begin negotiating an increase in
its credit line during the fourth quarter of fiscal 1997 to ensure adequate
financing for the Company's anticipated growth during fiscal 1998.
During the quarter ended November 30, 1996, the Company acquired a
parcel of land in Las Vegas on which it plans to construct an
office/warehouse to replace the existing branch operation. Of the $400,000
purchase price, $130,000 was borrowed under the Company's term loan facility
and $250,000 was financed by the seller. The seller financing matures in
September 1997. Management is seeking to sell the property to a buyer who
will construct the building and lease the completed facility to the Company
under a long-term lease.
In October 1996, the Company entered into an agreement pursuant to which
St. James Capital Partners, L.P. ("St. James"), based in Houston, will make
available to the Company up to $5 million that may be used in connection with
acquisitions by the Company. In December 1996 and January 1997, the Company
entered into letters of intent to acquire an HVACR wholesale distributor and
a manufacturer of electrostatic filters. The aggregate purchase price of the
two acquirees is estimated to be $3.3 million, with approximately one-half of
the purchase price to be paid to the sellers in cash, and the balance to be
financed by the sellers. The Company expects to obtain from St. James the
cash required for the acquisitions. The terms of the financing to be
provided by St. James have not yet been negotiated, but are likely to include
a provision to permit conversion of such indebtedness to equity of the
Company at a price in excess of the current market price for the Company's
common stock. The Company expects to consummate the two acquisitions before
the end of fiscal 1997; however, there has been no definitive agreement
executed for either planned acquisition.
The Company has approximately $33 million in tax loss carryforwards and
$1.1 million in tax credit carryforwards. Such operating loss and tax credit
carryforwards will substantially limit the Company's federal income tax
liabilities in the near future.
-8-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended November 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACR GROUP, INC.
January 14, 1997 /s/ Anthony R. Maresca
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Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 262,075
<SECURITIES> 0
<RECEIVABLES> 10,715,570
<ALLOWANCES> 787,571
<INVENTORY> 10,765,929
<CURRENT-ASSETS> 21,225,680
<PP&E> 4,593,168
<DEPRECIATION> 1,772,431
<TOTAL-ASSETS> 26,317,330
<CURRENT-LIABILITIES> 10,138,445
<BONDS> 0
0
0
<COMMON> 103,716
<OTHER-SE> 6,950,685
<TOTAL-LIABILITY-AND-EQUITY> 26,317,330
<SALES> 62,911,596
<TOTAL-REVENUES> 0
<CGS> 50,792,694
<TOTAL-COSTS> 50,792,694
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 675,073
<INCOME-PRETAX> 1,308,698
<INCOME-TAX> 45,509
<INCOME-CONTINUING> 1,263,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,263,189
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
