<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-12490
ACR GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-2008473
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Wilcrest Drive, Suite 440, Houston, Texas 77042
- ---------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(713) 780-8532
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Shares of Common Stock outstanding at September 30, 1998 - 10,634,303.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
August 31, February 28,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 96,798 $ 90,000
Accounts receivable, net of allowance
for doubtful accounts 16,319,110 11,888,542
Inventory 18,285,209 16,962,351
Prepaid expenses and other 382,009 611,873
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 35,570,126 30,039,766
------------ ------------
Property and equipment, net of accumulated
depreciation 3,604,522 3,713,827
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 5,877,126 5,962,700
Other assets 450,944 418,528
------------ ------------
$ 46,475,718 $ 41,107,821
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,383,691 $ 1,337,065
Accounts payable 19,257,398 14,009,495
Accrued expenses and other liabilities 1,562,244 1,146,211
------------ ------------
Total current liabilities 22,203,333 16,492,771
Long-term debt and capital lease obligations 14,600,093 16,654,630
------------ ------------
Total liabilities 36,803,426 33,147,401
------------ ------------
Shareholders' equity:
Common stock 106,343 106,340
Additional paid-in capital 41,729,197 41,669,200
Accumulated deficit (32,163,248) (33,815,120)
------------ ------------
Total shareholders' equity 9,672,292 7,960,420
------------ ------------
$ 46,475,718 $ 41,107,821
============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
- 1 -
<PAGE> 3
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Three months ended
August 31, August 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 64,994,434 $ 48,223,439 $ 36,842,700 $ 27,626,657
Cost of sales 51,667,113 38,772,525 29,333,110 22,300,664
------------ ------------ ------------ ------------
Gross profit 13,327,321 9,450,914 7,509,590 5,325,993
Selling, general and
administrative expenses (10,703,963) (8,037,034) (5,713,706) (4,233,504)
Other operating income 47,171 184,475 6,194 46,521
------------ ------------ ------------ ------------
Operating income 2,670,529 1,598,355 1,802,078 1,139,010
Interest expense (1,024,319) (688,310) (522,115) (377,930)
Other non-operating income 106,262 81,206 57,291 39,443
------------ ------------ ------------ ------------
Income before income taxes 1,752,472 991,251 1,337,254 800,523
Provision for income taxes (100,600) (41,810) (69,900) (31,500)
------------ ------------ ------------ ------------
Net income $ 1,651,872 $ 949,441 $ 1,267,354 $ 769,023
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 10,634,185 10,373,780 10,634,303 10,376,005
Diluted 11,449,674 12,268,714 11,402,246 12,211,648
Earnings per common share:
Basic $ .16 $ .09 $ .12 $ .07
Diluted .14 .08 .11 .07
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
- 2 -
<PAGE> 4
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
August 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 1,651,872 $ 949,441
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 564,695 429,677
(Gain) loss on sale of assets (2,024) --
Other 60,000 --
Changes in operating assets and liabilities:
Accounts receivable (4,430,568) (4,229,785)
Inventory (1,322,858) (568,948)
Prepaid expense and other assets 156,436 (255,314)
Accounts payable 5,247,903 4,025,174
Accrued expenses and other liabilities 416,033 370,552
----------- -----------
Net cash provided by operating activities 2,341,489 720,797
----------- -----------
Investing activities:
Acquisition of property and equipment (333,898) (324,048)
Acquisition of businesses, net of cash acquired -- (90,956)
Proceeds from disposition of assets 63,050 --
----------- -----------
Net cash used in investing activities (270,848) (415,004)
----------- -----------
Financing activities:
Proceeds from long-term debt -- 525,478
Payments on long-term debt (2,063,843) (748,032)
Exercise of stock options -- 1,054
----------- -----------
Net cash used in financing activities (2,063,843) (221,500)
----------- -----------
Net increase in cash 6,798 84,293
Cash at beginning of year 90,000 412,699
----------- -----------
Cash at end of period $ 96,798 $ 496,992
=========== ===========
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired -- 430,776
Fair value of liabilities acquired -- 447,381
Goodwill -- 112,836
Purchase of property and equipment under
capital leases (net of cash paid) 67,789 190,239
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
- 3 -
<PAGE> 5
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. The results of operations for
the three-month and six-month periods ended August 31, 1998 are not necessarily
indicative of the results to be expected for the full year.
Substantially all inventories represent finished goods held for sale.
2 - Acquisitions
On September 9, 1997, the Company, through a wholly-owned subsidiary,
acquired certain of the assets, and assumed certain of the liabilities, of
Contractors Heating and Supply Company ("CHS"). CHS was paid $4,626,315 cash at
closing, and received a promissory note ("Note") for $1,200,000. The liabilities
assumed by the Company's subsidiary included $1,200,000 owed by CHS to certain
of its shareholders, and was paid in full at closing by the Company's
subsidiary. The Note bears interest at prime rate plus 1/2%. The Note is to be
repaid in three annual principal installments of $400,000 each, plus accrued
interest, beginning September 1, 1998, and is secured by a first lien on
machinery and equipment purchased from CHS that is used to fabricate sheet metal
products. The Note is subordinated to the Company's indebtedness to its senior
secured lender.
The acquisition described above was accounted for using the purchase method
of accounting. Unaudited pro forma results of the Company's operations, as if
the acquisition of CHS had occurred as of March 1, 1997, are as follows:
<TABLE>
<CAPTION>
Six Months Ended
August 31, 1997
----------------
<S> <C>
Sales $ 57,692,979
Net income 1,039,831
Earnings per common share:
Basic $ .10
Diluted .09
</TABLE>
These pro forma results are presented for comparative purposes only and
include certain adjustments to give effect to occupancy cost for facilities
leased from CHS, interest expense on acquisition debt, amortization of goodwill
and additional depreciation expense as a result of a step-up in the basis of
fixed assets, together with related income tax effects. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination occurred on March 1, 1997, or of future results of the
consolidated entities.
- 4 -
<PAGE> 6
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2 - Acquisitions (continued)
In April 1997, the Company acquired for approximately $70,000 the assets and
liabilities of ACH Supply, Inc. ("ACH"), a wholesale distributor of HVACR
products with two branches in the Los Angeles area. Pro forma results of
operations relating to this acquisition are not presented because the effects of
the acquisition would not be material.
3 - Contingent Liabilities
The Company has an arrangement with an HVACR equipment manufacturer and a
field warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of the Company's operations in Georgia and
Memphis, with payment due only when products are sold. Such inventory is
accounted for as consigned merchandise and is not recorded on the Company's
balance sheet. As of August 31, 1998, the cost of such inventory held in the
bonded warehouses was $6,616,152.
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.
4 - Income Taxes
The provision for income taxes consists principally of alternative minimum
taxes and current state income taxes. The Company has net operating loss and tax
credit carryforwards which offset substantially all of its federal taxable
income.
- 5 -
<PAGE> 7
ACR GROUP, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Six-Month and Three-Month Periods
Ended August 31, 1998 and August 31, 1997
Six Months Ended August 31, 1998 Compared to 1997
Net income increased to $1,651,872 in the six-month period ended August 31,
1998 (fiscal 1999) from $949,441 in the six-month period ended August 31, 1997
(fiscal 1998), an increase of 74%. The improvement in results of operations in
fiscal 1999 was generally attributable to favorable weather conditions during
the months of May and June in the southern and southeastern United States and to
the operations of Contractors Heating & Supply, Inc. ("CHS"), which was acquired
by the Company in September 1997.
Consolidated sales increased 35% from fiscal 1998 to 1999. 63% of the
increase in sales from 1998 to 1999 was a result of the Company's acquisition of
CHS in 1997. Same store sales for branches open for more than one year at the
beginning of the fiscal year increased 13% in the six-month period ended August
31, 1998, compared to a decrease of 1% in same store sales in the same period of
1997. The greatest increases in same store sales occurred in Texas and the
southeastern United States, where weather conditions were drier and warmer than
usual in May and June, resulting in increased demand for air conditioning
products. In contrast, weather conditions during the spring and early summer of
1997 were abnormally wet and cool, which restricted demand for air conditioning
products. The sales increase in Florida, where the Company started operations in
April 1996, is also a function of the expected growth pattern when the Company
opens new branches. In such cases, management expects above average sales growth
for up to five years as the new operations continuously gain market share. The
Company has experienced a similar pattern of sales growth in California, where
the Company acquired a small HVACR distribution business, ACH Supply, Inc., in
April 1997, and subsequently reorganized management and relocated both branches
to more suitable facilities.
The Company's gross margin percentage on sales was 20.5% for the six-month
period ended August 31, 1998, compared to 19.6% in 1997. The higher gross margin
percentage in 1998 is a result of the gross margin attained at CHS. Excluding
CHS's operations, the Company's gross margin percentage increased from 19.0% in
1997 to 19.2% in 1998.
Selling, general and administrative ("SG&A") expenses increased 33% in the
six-month period ended August 31, 1998 compared to the same period of 1997,
because of the costs associated with both the acquired operations described
above and the increase in business at the Company's other operations. Expressed
as a percentage of sales, SG&A expenses decreased from 16.7% in 1997 to 16.5% in
1998. This decrease was attributable to both a low SG&A expense to sales ratio
at CHS and control over growth of SG&A expenses at the Company's other
operations.
- 6 -
<PAGE> 8
Other operating income declined from 1997 to 1998 because of the
discontinuation in January 1998 of an arrangement with a supplier under which
the Company recognized commission revenue for providing warehousing and shipping
services to another distributor of the supplier. In addition, energy services
income decreased 55% from 1997. The Company continues to provide energy
management services on a month-to-month basis to the customer, and management
cannot estimate how long such an informal arrangement may continue. However, the
customer is partially dependent on the Company for the proper operation of its
HVACR systems.
Interest expense increased 49% from 1997 to 1998 (from 1.4% to 1.6% of
sales) as a result of additional borrowings, the majority of which were incurred
to acquire CHS and ACH Supply in 1997.
The provision for income taxes consists principally of alternative minimum
taxes and state income taxes. As a result of the Company's substantial tax loss
carryforwards, the Company has minimal liability for Federal income taxes. See
Liquidity and Capital Resources, below.
Three Months Ended August 31, 1998 Compared to 1997
Net income increased to $1,267,354 in the quarter ended August 31, 1998 from
$769,023 in the quarter ended August 31, 1997, an increase of 65%. Consistent
with the reasons described above, the improvement in results of operations in
the second quarter of fiscal 1999 was generally attributable to much warmer
weather in the southern and southeastern United States during June 1998 compared
to 1997, and to the operations of Contractors Heating & Supply, Inc. ("CHS").
Sales increased 33% from the second quarter of fiscal 1998 to fiscal 1999.
Of the growth in sales, approximately 65% was generated from the operations of
CHS. Same store sales for branches open for more than one year at the beginning
of the quarter increased 12.5% in the quarter ended August 31, 1998. Sales in
the second quarter of fiscal 1999 were substantially equal to or greater than
sales in the same period of fiscal 1998 at all of the Company's operations
except in the Memphis area, where organizational changes have not yet been fully
integrated.
The Company's gross margin percentage on sales was 20.4% for the quarter
ended May 31, 1998, compared to 19.3% in 1997. Excluding the operations of CHS,
the gross margin on sales was 19.7% in 1998. The improvement in the gross margin
percentage in the second quarter was attributable to both the growth rate of the
Company's higher margin operations and a successful effort to increase the gross
margin percentage at the Company's operations which sell predominantly the GMC
brand of HVAC equipment.
SG&A expenses as a percentage of sales increased from 15.3% in 1997 to 15.5%
in 1998, principally as a result of the costs to relocate store operations in
Las Vegas and costs attendant to the organizational changes in Memphis. Interest
expense increased 38% from 1997 to 1998 as a result of the indebtedness incurred
to acquire CHS.
- 7 -
<PAGE> 9
Liquidity and Capital Resources
Current assets increased 18% from February 28, 1998 to August 31, 1998,
principally in accounts receivable and inventory, reflecting usual seasonal
trends. Gross accounts receivable represented 46 days of gross sales as of
August 31, 1998, compared to 48 days of gross sales in receivables at August 31,
1997, reflecting successful collection efforts and very effective credit
policies at CHS. Inventory from the end of February to the end of August
increased by 8% in 1998, compared to 6% in 1997.
The Company has credit facilities with a commercial bank ("Bank") which
include an $18 million revolving line of credit and a $500,000 term loan
facility for the purchase of capital equipment. At August 31, 1998, the Company
had available credit of $4.5 million and $120,000 under the revolving credit
line and the term loan facility, respectively. At August 31, 1998, substantially
all of the outstanding balance on the revolving credit line bears interest at
LIBOR plus 3.00%, with the remainder of the revolving credit line and the
outstanding balance on the term loan facility bearing interest at the Bank's
prime rate plus 1/2%. The maximum availability under the revolving credit
facility is dependent on the levels of the underlying collateral and,
accordingly, fluctuates seasonally corresponding to the seasonality of the
Company's business. Management believes that availability under the revolving
credit facility will be adequate to finance the Company's working capital
requirements of its existing operations for the foreseeable future.
The Company routinely considers financing alternatives in order to continue
its plan of acquiring other HVACR distribution companies. Such financing may be
in the form of equity, subordinated debt or some combination of debt and equity.
Although management has engaged in discussions with several potential investors
or lenders, the Company has no commitment for additional financing and cannot
predict whether or when such additional financing may materialize, particularly
in light of recent volatility in the U.S. equity markets. Management is also
reviewing the suitability of certain acquisition opportunities, but has not
entered into letters of intent to acquire such companies. The Company's ability
to consummate a significant acquisition would be dependent upon obtaining
additional financing.
The Company has approximately $32 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.
Year 2000 Issue
The Company has addressed its state of readiness to deal with the problem
commonly known as the Year 2000 issue. With respect to its own information
systems, in October 1998, the Company acquired an upgrade, available under its
current licensing agreement, to its existing integrated application software
that is fully year 2000 compliant. The Company has both dedicated internal staff
and contracted with a third party to assist in implementation of the software
upgrade
- 8 -
<PAGE> 10
and conversion of existing software modifications. The Company believes that
the new software will be fully functional by December 31, 1998. One of the
Company's subsidiaries does not utilize the Company's integrated software and
is presently involved in modifying its computer programs to accommodate year
2000; this task is expected to be completed by the end of fiscal 1999. The
Company does not believe that it has material exposure to year 2000 in elements
of its operations other than its information systems, but management is
continuing to update its assessment of such elements. The costs to achieve
year 2000 compliance are not expected to be material to the Company's
operations.
The Company has informally discussed year 2000 preparedness with its most
significant suppliers and has obtained assurances that such suppliers do not
expect any disruption in their ability to fulfill customer orders as a result of
year 2000 issues. The Company is preparing to request written confirmation of
year 2000 preparedness from each of such suppliers. To date, the Company has not
undertaken to assess the year 2000 preparedness of its customers. The Company
does not have any interconnectivity with its customers' computer systems, and no
customer represents more than 1% of consolidated sales. Management expects to
initiate discussions with its most significant customers concerning their year
2000 preparedness during the fourth quarter of fiscal 1999, but does not believe
that customers' lack of preparedness would have a material adverse effect on the
Company's sales or results of operations.
The Company has not developed a specific contingency plan to address a worst
case scenario dealing with lack of year 2000 preparedness. Management is
confident that the Company's own internal systems will be fully year 2000
compliant and that a contingency plan would principally address issues relating
to the potential inability of suppliers, service providers or customers to
satisfactorily address their own year 2000 issues. As described above, the
Company expects to continually assess the year 2000 preparedness of such parties
and, if circumstances dictate, may undertake specific contingency plans.
- 9 -
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 4. - RESULTS OF VOTES OF SECURITY HOLDERS
At the Annual Meeting of Shareholders on August 27, 1998, the shareholders
of the Company voted on and approved the following issue:
Election of Directors for a term of one year expiring at the next Annual
Meeting of Shareholders:
<TABLE>
<CAPTION>
Shares Shares
For Withheld
--------- --------
<S> <C> <C>
Anthony R. Maresca 9,076,041 39,650
Ronald T. Nixon 9,075,041 40,650
Roland H. St. Cyr 9,074,791 40,900
Alex Trevino, Jr. 9,075,636 40,055
A. Stephen Trevino 9,075,141 40,550
</TABLE>
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibit 27.
(b) No report on Form 8-K was filed during the quarter ended August 31,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACR GROUP, INC.
October 15, 1998 /s/ Anthony R. Maresca
- ----------------------------- ----------------------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
- 10 -
<PAGE> 12
EXHIBIT INDEX
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 96,798
<SECURITIES> 0
<RECEIVABLES> 17,218,858
<ALLOWANCES> 899,748
<INVENTORY> 18,285,209
<CURRENT-ASSETS> 35,570,126
<PP&E> 6,675,777
<DEPRECIATION> 3,071,255
<TOTAL-ASSETS> 46,475,718
<CURRENT-LIABILITIES> 22,203,333
<BONDS> 0
0
0
<COMMON> 106,343
<OTHER-SE> 9,565,949
<TOTAL-LIABILITY-AND-EQUITY> 46,475,718
<SALES> 64,994,434
<TOTAL-REVENUES> 65,147,867
<CGS> 51,667,113
<TOTAL-COSTS> 51,667,113
<OTHER-EXPENSES> 10,703,963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024,319
<INCOME-PRETAX> 1,752,472
<INCOME-TAX> 100,600
<INCOME-CONTINUING> 1,651,872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,651,872
<EPS-PRIMARY> .16
<EPS-DILUTED> .14
</TABLE>
