<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 November 30, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- --------------------0
Commission file number 0-12490
ACR GROUP, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-2008473
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Wilcrest Drive, Suite 440, Houston, Texas 77042
- ---------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(713) 780-8532
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Shares of Common Stock outstanding at December 31, 1998 - 10,634,303.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
November 30, February 28,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 154,668 $ 90,000
Accounts receivable, net of allowance
for doubtful accounts 14,799,379 11,888,542
Inventory 17,379,437 16,962,351
Prepaid expenses and other 403,953 611,873
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 33,224,437 30,039,766
------------ ------------
Property and equipment, net of accumulated
depreciation 3,553,162 3,713,827
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 5,834,340 5,962,700
Other assets 467,830 418,528
------------ ------------
Total assets $ 44,052,769 $ 41,107,821
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,432,233 $ 1,337,065
Accounts payable 13,905,598 14,009,495
Accrued expenses and other liabilities 1,631,010 1,146,211
------------ ------------
Total current liabilities 16,968,841 16,492,771
Long-term debt and capital lease obligations 17,113,622 16,654,630
------------ ------------
Total liabilities 34,082,463 33,147,401
------------ ------------
Shareholders' equity:
Common stock 106,343 106,340
Additional paid-in capital 41,697,947 41,669,200
Accumulated deficit (31,833,984) (33,815,120)
------------ ------------
Total shareholders' equity 9,970,306 7,960,420
------------ ------------
Total liabilities and
shareholders' equity $ 44,052,769 $ 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>
Nine months ended Three months ended
November 30, November 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 92,670,721 $ 74,921,276 $ 27,676,287 $ 26,697,837
Cost of sales 73,406,907 59,807,561 21,739,794 21,035,036
------------ ------------ ------------ ------------
Gross profit 19,263,814 15,113,715 5,936,493 5,662,801
Selling, general and
administrative expenses (15,855,084) (12,821,614) (5,151,121) (4,784,580)
Other operating income 47,193 241,273 22 56,798
------------ ------------ ------------ ------------
Operating income 3,455,923 2,533,374 785,394 935,019
Interest expense (1,508,266) (1,233,646) (483,947) (545,336)
Other non-operating income 168,824 144,104 62,562 62,898
------------ ------------ ------------ ------------
Income before income taxes 2,116,481 1,443,832 364,009 452,581
Provision for income taxes
Current 135,345 73,139 34,745 31,329
Deferred -- (420,000) -- (420,000)
------------ ------------ ------------ ------------
Net income $ 1,981,136 $ 1,790,693 $ 329,264 $ 841,252
============ ============ ============ ============
Weighted average common
shares outstanding:
Basic 10,634,224 10,375,851 10,634,303 10,379,992
Diluted 11,397,177 12,261,823 11,292,184 12,248,042
Earnings per common share:
Basic $ .19 $ .17 $ .03 $ .08
Diluted .17 .15 .03 .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>
Nine months ended
November 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 1,981,136 $ 1,790,693
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 840,308 698,816
Deferred income taxes -- (420,000)
Loss (gain) on sale of assets 6,789 (1,538)
Other 28,750 --
Changes in operating assets and liabilities:
Accounts receivable (2,910,837) (3,315,751)
Inventory (417,086) 300,721
Prepaid expense and other assets 97,410 (149,301)
Accounts payable (103,898) 1,089,207
Accrued expenses and other liabilities 484,799 666,722
------------ ------------
Net cash provided by operating activities 7,371 659,569
------------ ------------
Investing activities:
Acquisition of property and equipment (514,608) (490,514)
Acquisition of businesses, net of cash acquired -- (5,478,177)
Proceeds from disposition of assets 73,677 267,183
------------ ------------
Net cash used in investing activities (440,931) (5,701,508)
------------ ------------
Financing activities:
Proceeds from long-term debt 1,624,343 13,389,674
Payment of long-term debt (1,126,115) (8,673,994)
Exercise of stock options -- 1,054
------------ ------------
Net cash provided by financing activities 498,228 4,716,734
------------ ------------
Net increase (decrease) in cash 64,668 (325,205)
Cash at beginning of year 90,000 412,699
------------ ------------
Cash at end of period $ 154,668 $ 87,494
============ ============
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired $ -- $ 5,702,433
Fair value of liabilities acquired -- 4,099,618
Goodwill -- 3,865,179
Purchase of equipment under capital leases
(net of cash paid):
Under capital leases 67,789 190,239
Sale of property for note receivable -- (201,136)
</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 nine-month periods ended November 30, 1998 are not
necessarily indicative of the results to be expected for the full year. Certain
prior year amounts have been reclassified to conform to current year
presentations.
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 (Note 3).
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>
Nine Months Ended
November 30, 1997
-----------------
<S> <C>
Sales $ 84,390,816
Net income 1,881,173
Earnings per common share:
Basic .18
Diluted .16
</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.
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 November 30, 1998, the cost of such inventory held in the
bonded warehouses was $6,616,136.
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. Management believes that substantially all consigned merchandise on
hand at November 30, 1998 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. The deferred tax benefit recognized in the quarter ended November 30,
1997 represents a reduction in the valuation allowance established against the
Company's deferred tax asset.
- 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 Nine-Month and Three-Month Periods
Ended November 30, 1998 and November 30, 1997
Nine Months Ended November 30, 1998 Compared to 1997
Net income increased to $1,981,136 for the nine months ended November 30,
1998 (fiscal 1999), compared to $1,790,693 for the nine months ended November
30, 1997 (fiscal 1998), an increase of 11%. In the quarter ended November 30,
1997, the Company reduced its deferred tax valuation allowance by $420,000 based
on a re-evaluation of the expected future utilization of its net operating loss
carryforwards following certain acquisitions during 1997. During fiscal 1999,
the Company has not recognized such a tax benefit. Excluding this tax benefit
from the comparison, net income increased 45% in the nine-month period ended
November 30, 1998, compared to the same period of 1997. The increase in net
income is attributable principally to the results of operations at Contractors
Heating and Supply, Inc. ("CHS") and Total Supply, Inc. ("TSI"). CHS was
acquired by the Company in September 1997; therefore, only three months of its
operations are included in the Company's results of operations for the
nine-month period ended November 30, 1997.
Consolidated sales increased 24% from fiscal 1998 to 1999. Although a
majority of the increase in sales was related to the acquisition of CHS
described above, the Company also experienced sales gains of 10% or more in
Georgia, Texas, Florida and California through the third quarter of fiscal 1999,
compared to fiscal 1998. Sales at branches that have been open since the first
quarter of fiscal 1998 increased 12% in the first nine months of fiscal 1999,
compared to fiscal 1998. Unusually hot weather during late spring and early
summer fueled sales gains in most areas of the southern United States, but such
gains were somewhat mitigated by slower sales in late summer and fall, with
moderate weather conditions in November postponing expected sales of heating
products.
The Company's gross margin percentage on sales increased to 20.8% for the
nine-month period ended November 30, 1998, compared to 20.2% in 1997. The higher
gross margin percentage in 1998 is a result of a continued growth at those
operations which were most recently acquired or started, in particular, CHS and
in California. These operations sell less HVACR equipment as a percentage of
total sales than most of the Company's other operations and, accordingly, attain
a higher gross margin percentage on aggregate sales. The gross margin at CHS was
also assisted by a decline in steel prices, thereby generating higher margins at
CHS's sheet metal fabrication business.
Selling, general and administrative ("SG&A") expenses, expressed as a
percentage of sales, have remained constant at 17.1% from fiscal 1998 to fiscal
1999. Since the third quarter of fiscal 1998, the Company has added personnel to
enhance the operating management and internal control of certain of its
businesses. The Company has also expended additional funds, including personnel,
to improve its management information systems.
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. 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. The Company and the customer have had preliminary discussions
concerning a
- 6 -
<PAGE> 8
possible purchase by the customer from the Company of the energy management
equipment located at the customer's premises.
Interest expense increased 22% from fiscal 1998 to fiscal 1999 as a result
of the Company's increased borrowings, principally for acquisition indebtedness.
As a percentage of sales, however, interest expense has declined from 1.65% in
fiscal 1998 to 1.63% in fiscal 1999. This trend was assisted by the general
decline in the prime interest rate in the second and third quarters of fiscal
1999.
The current 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. As described above, in the
quarter ended November 30, 1997, the Company reduced the valuation allowance
established against its deferred tax asset and recognized a deferred tax benefit
of $420,000.
Three Months Ended November 30, 1998 Compared to 1997
Net income declined from $841,252 in the quarter ended November 30, 1997
to $329,264 in the quarter ended November 30, 1998, a decrease of 61%. Excluding
the $420,000 deferred tax benefit noted above, the decline in net income from
1997 to 1998 would be 22%. Although business remained strong at the Company's
Colorado and Georgia operations, most of the Company's other operations were
adversely affected by a slump in sales during late summer and fall. For the
third quarter ended November 30, consolidated sales increased 4% from 1997 to
1998, with same store sales increasing 6%. The general softness in sales was
attributed to extraordinarily strong sales in the spring and early summer of
1998, when many of the Company's markets experienced record heat. Additionally,
moderate weather conditions in November delayed the commencement of sales of
heating products.
Gross margin percentage in the quarter ended November 30, 1998 increased
to 21.4%, compared to 21.2% in 1997. In the 1998 third quarter, CHS benefitted
from lower raw material costs for its sheet metal fabrication operation, and
management intensified its focus on increasing the gross margin percentage at
certain other operations. Although the success of this effort will be measured
over several fiscal quarters, the increase in gross margin percentage in the
1998 third quarter may be an initial indicator of the results of these efforts.
SG&A expenses as a percentage of sales increased from 17.9% in the quarter
ended November 30, 1997 to 18.6% in the same quarter of 1998, for the reasons
described above. Interest expense decreased 11% from 1997 to 1998, principally
as a result of a decline in the Company's average borrowing rate.
Liquidity and Capital Resources
Current assets increased 11% from February 28, 1998 to November 30, 1998,
principally in accounts receivable and inventory, reflecting usual seasonal
trends. Gross accounts receivable represented 52 days of gross sales as of
November 30, 1998, compared to 54 days of gross sales in receivables at November
30, 1997, reflecting a continuation of the Company's successful efforts to
accelerate collection of its accounts receivable. Inventory from the end of
February to the end of November increased by 2% both in 1998 and in 1997,
excluding the effect of the acquisition of CHS 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
- 7 -
<PAGE> 9
for the purchase of capital equipment. At November 30, 1998, the Company had
available credit of $1.0 million and $130,000 under the revolving credit line
and the term loan facility, respectively. At November 30, 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.
In January 1999, the Company acquired a wholesale distributor based in
Beaumont, Texas for $850,000. The Company utilized funds available under its
revolving line of credit to pay the cash portion of the purchase price
($520,000) and executed a note to the seller for the balance of the purchase
price ($330,000).
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 other
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 $31 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 December 1998, the Company installed an upgrade to its existing
integrated application software such that the software is now fully year 2000
compliant. 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
- 8 -
<PAGE> 10
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 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
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, 1999 /s/ Anthony R. Maresca
- ----------------------------- ----------------------
Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
- 10 -
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACR GROUP,
INC. CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 154,668
<SECURITIES> 0
<RECEIVABLES> 15,725,400
<ALLOWANCES> 926,021
<INVENTORY> 17,379,437
<CURRENT-ASSETS> 33,224,437
<PP&E> 6,801,546
<DEPRECIATION> 3,248,384
<TOTAL-ASSETS> 44,052,769
<CURRENT-LIABILITIES> 16,968,841
<BONDS> 0
0
0
<COMMON> 106,343
<OTHER-SE> 9,863,963
<TOTAL-LIABILITY-AND-EQUITY> 44,052,769
<SALES> 92,670,721
<TOTAL-REVENUES> 92,670,721
<CGS> 73,406,907
<TOTAL-COSTS> 73,406,907
<OTHER-EXPENSES> 15,645,515
<LOSS-PROVISION> 209,569
<INTEREST-EXPENSE> 1,508,266
<INCOME-PRETAX> 2,116,481
<INCOME-TAX> 135,345
<INCOME-CONTINUING> 1,981,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,981,136
<EPS-PRIMARY> .19
<EPS-DILUTED> .17
</TABLE>
