<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
For Annual Reports Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
February 29, 2000 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 28, 2000 was $12,203,358. 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
28, 2000: 10,670,634 shares
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in August 2000 is incorporated by reference in answer to
Part III of this report.
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<TABLE>
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 8. Financial Statements and Supplementary
Data 19
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 41
PART III
Item 10. Directors and Executive Officers of the
Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial
Owners and Management 41
Item 13. Certain Relationships and Related
Transactions 41
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 42
</TABLE>
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PART I
Item 1. Business.
General
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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 eight additional
HVACR distribution companies and now has 39 branch operations in nine states.
The Company plans to continue expanding in the Sunbelt of the United States and
in other geographic areas with a high rate of economic growth, through both
acquisitions and internal growth.
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
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limit the number and territory of wholesalers that may distribute their
products, but 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 provide 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 70%
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.
The Company's operations are conducted through nine subsidiaries that
participate in the wholesale distribution of HVACR equipment and supplies:
ACR Supply, Inc.
----------------
The Company acquired ACR Supply, Inc. ("ACRS") effective February 28, 1993,
after making an initial investment in the company in 1991. At the end of
fiscal 2000, ACRS had fifteen branches in Texas and one in Louisiana. Many
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.
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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 25% equipment and 75% 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
independent HVACR distributors in the Las Vegas area that compete with HCS.
Management believes that HCS is among the top three of such distributors in
terms of annual sales from branch operations in the local area.
HCS's sales growth in the past several years has mirrored the well-
documented growth of the Las Vegas economy, 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 its 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 45% of total sales at the end of fiscal 2000.
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. Since December
1992, TSI has distributed the GMC brand of HVACR equipment in Georgia and
now has the GMC distribution rights to almost the entire state of Georgia.
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
69% equipment and 31% parts and supplies. TSI has four branches located in
the Atlanta metropolitan area and one branch in Warner Robins, a suburb of
Macon. In the late spring of 2000, the Company plans to open another
branch in Savannah, Georgia.
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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 who ceased business
operations. Although sales of GMC equipment initially comprised virtually
all of VSI's sales, management has continuously emphasized increasing sales
of higher profit HVACR parts and supplies. Approximately 77% of VSI's sales
consisted of GMC equipment in fiscal 2000. In fiscal 1998, the Company
assigned to management of TSI the responsibility for VSI's operations. In
fiscal 2000, the Company opened a new distribution center in Nashville,
Tennessee, predominantly selling GMC equipment in the larger metropolitan
areas of central and eastern Tennessee.
Ener-Tech Industries, Inc.
--------------------------
In January 1996, the Company acquired Ener-Tech Industries, Inc. ("ETI"),
an HVACR distributor in Nashville, Tennessee. Unlike the Company's other
HVACR distribution operations, ETI specializes in an industry subsegment.
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 than the Company's other
distribution businesses. Additionally, ETI's sales tend to be greater in
the cooler seasons of the year, when gas controls are in higher demand.
Florida Cooling Supply, Inc.
----------------------------
In 1996, the Company organized Florida Cooling Supply, Inc. ("FCS") and
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. The Company's sales mix is approximately 30% equipment and 70%
parts and supplies. In fiscal 2000, the Company closed its branch in Winter
Haven, Florida with service to customers in that market area continuing
from the Lakeland, Florida branch.
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Lifetime Filter, Inc.
---------------------
In January 1997, the Company acquired Lifetime Filter, Inc. ("LFI"), a
manufacturer of electrostatic air filters, which sells its products
principally to HVACR contractors and dealers by mail order. LFI is based in
Katy, Texas, a suburb of Houston. The Company's existing wholesale
distribution network also distributes the products manufactured by LFI. LFI
recently began a business to business networking relationship via the
Company's web site, allowing potential customers to order a variety of
filter and filter products over the internet.
West Coast HVAC Supply, Inc. d/b/a ACH Supply
---------------------------------------------
In April 1997, West Coast HVAC Supply, Inc. acquired the operating assets
and liabilities of ACH Supply, Inc., ("ACH"). ACH had two branches located
east of Los Angeles. In fiscal 1999, ACH opened a third branch in Canoga
Park. The Company has attracted key employees with significant management
experience working for a much larger HVACR wholesale distributor in
southern California. ACH sells primarily HVACR parts and supplies, and,
late in fiscal 2000, began distributing the Tappan brand of HVACR
equipment.
Contractors Heating & Supply, Inc. ("CHS")
------------------------------------------
In September 1997, CHS acquired certain of the assets, and assumed certain
of the liabilities, of Contractors Heating and Supply Company, an HVACR
distributor based in Denver, with branch operations in Colorado Springs and
Glenwood Springs, Colorado, and in Albuquerque, New Mexico. CHS has
operated in Denver since 1945, in Colorado Springs since 1959 and in
Albuquerque since 1960, and is considered the market leader in each of its
trade areas. CHS also operates a sheet metal shop in Colorado Springs,
where products are fabricated for distribution through CHS's wholesale
operations. Approximately 22% of CHS's total sales are products that it
manufactures. In April 1999, CHS opened a distribution branch in Fort
Collins, Colorado, and, in March 2000, acquired International Comfort
Supply, Inc., a wholesale distributor based in El Paso, Texas.
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. Pursuant to service contracts, customers paid ACRG a specified
percentage of the utility cost savings attributable to the Systems over the term
of the contract. The Company's contracts for its remaining Systems have all
expired. In fiscal 2000, the Company reached an understanding with its final
energy services customer to terminate services at the end of October 1999, with
the
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customer agreeing to make a contract termination payment to the Company and to
provide utility bills necessary for the Company to invoice the customer through
the termination date. This process was completed in April 2000.
Executive Officers of the Registrant
------------------------------------
The Company's executive officers are as follows:
<TABLE>
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Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Alex Trevino, Jr. 63 Chairman of the Board and President
Anthony R. Maresca 49 Senior Vice President, Secretary, Treasurer,
and Chief Financial Officer
</TABLE>
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
September 1987 to 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, 2000, the Company and its subsidiaries had approximately
340 full-time employees. Neither the Company nor its subsidiaries routinely use
temporary labor. There are no Company employees 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 25,000 square feet of showroom and warehouse space. Branch locations
that include a subsidiary's corporate office will be larger. The Company owns
the facilities occupied by LFI and by the Pasadena, Texas branch of ACRS.
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Item 3. Legal Proceedings.
As of February 29, 2000 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, 2000.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock trades on the NASDAQ Stock Market(R) under the
symbol "ACRG." The table below sets forth the high and low sales prices based
upon actual transactions.
<TABLE>
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High Low
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Fiscal Year 2000
<S> <C> <C>
1st quarter ended 5/31/99 $2.38 $1.03
2nd quarter ended 8/31/99 1.97 1.13
3rd quarter ended 11/30/99 1.75 1.13
4th quarter ended 2/29/00 2.13 1.09
Fiscal Year 1999
1st quarter ended 5/31/98 $2.81 $1.75
2nd quarter ended 8/31/98 2.13 1.50
3rd quarter ended 11/30/98 2.00 1.00
4th quarter ended 2/28/99 1.63 1.00
</TABLE>
As of April 28, 2000, there were 491 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.
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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 audited consolidated financial statements. This summary should be read in
conjunction with the audited consolidated financial statements and related notes
included in Item 8 of this Report. Since February 28, 1995, the increase in
sales has resulted from acquisitions and internal expansion, as discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7. of this Report. The Company has never paid any dividends.
The Company has not recorded a provision for income taxes other than
federal alternative minimum taxes and state income taxes for fiscal years 1996
through 2000 because of previously incurred net operating losses for which a tax
benefit had not previously been recorded. Additionally, the Company determined
in both fiscal 1998 and 1997 that further reductions in its deferred tax asset
valuation allowance were appropriate, given expectations of higher future
taxable income from recently acquired businesses. As a result, the Company
recorded additional tax benefits of $420,000 and $360,000 in fiscal 1998 and
1997, respectively.
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(In thousands except per share data )
<TABLE>
<CAPTION>
Year Ended February 29 or 28,
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2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Income Statement Data:
Sales $126,468 $117,887 $96,164 $78,371 $56,500
Gross Profit 28,135 24,772 19,558 15,085 10,721
Operating income 4,077 3,317 2,064 1,659 765
-------- -------- ------- ------- -------
Income before income taxes 2,482 1,568 570 887 199
Benefit (provision) for income taxes (255) (153) 333 258 (15)
-------- -------- ------- ------- -------
Net Income $2,227 $1,415 $903 $1,145 $184
======== ======== ======= ======= =======
Earnings per common share:
Basic $ .21 $ .13 $ .09 $ .11 $ .02
======== ======== ======= ======= =======
Diluted $ .20 $ .12 $ .08 $ .10 $ .02
======== ======== ======= ======= =======
<CAPTION>
As of February 29 or 28,
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2000 1999 1998 1997 1996
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $18,072 $15,614 $13,547 $11,080 $8,118
Total assets 44,842 45,103 41,108 30,558 22,010
Long-term obligations 17,499 17,616 16,655 11,160 6,703
Shareholders' equity 11,630 9,391 7,960 7,006 5,666
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
---------------------
Operating income increased to $4,077,468 in fiscal 2000, from $3,316,631 in
fiscal 1999 and $2,063,996 in fiscal 1998, representing increases of 23% and 61%
in fiscal 2000 and 1999, respectively. The increases in operating income in
both fiscal 2000 and 1999 were attributable to a continued improvement in the
financial performances of the Company's larger, more seasoned companies. The
increase in operating income in fiscal 1998, compared to fiscal 1997, was a
result of earnings from Contractors Heating & Supply ("CHS"), which the Company
acquired in September 1997. Net income was $2,226,633, $1,415,080 and $903,366
in fiscal 2000, 1999 and 1998, respectively. Reductions in the Company's
deferred tax asset valuation allowance increased net income by $420,000 in
fiscal 1998 and $360,000 in fiscal 1997.
Sales have increased annually; reaching $126.5 million in fiscal 2000,
compared to $117.9 million in fiscal 1999 and $96.2 million in fiscal 1998.
Same store sales increased 5%, 14% and 7% in fiscal 2000, 1999 and 1998,
respectively, with each year exceeding the industry average. The slower rate of
growth in fiscal 2000 was due to mild weather conditions in Colorado and a
combination of weather-related factors in Florida and Texas. Such was the case
in fiscal 1998 in the Southeast along with a post-Olympic building slowdown in
Georgia. Through fiscal 1997, the majority of the Company's sales growth had
resulted from internal expansion of branch operations rather than from
acquisitions, but in fiscal 1999 and 1998, respectively, 54% and 71% of the
increase in sales was attributable to operations acquired since January 1997. In
fiscal 2000, internal expansion of branch operations again accounted for the
sales growth, a steady though less spectacular increase.
The Company's gross margin percentage increased to 22.2% in fiscal 2000, from
21.0% in fiscal 1999 and 20.3% in fiscal 1998. The continual increase in gross
margin percentage from fiscal 1998 is a result of management's effort to focus
the Company on starting and acquiring businesses that are expected to enhance
the Company's gross margin percentage. The Company's gross margin percentage
has also been favorably affected by purchasing arrangements that management has
negotiated from its major suppliers, and by technology improvements that have
enabled management to implement more sophisticated pricing strategies.
In addition, CHS manufactures products that account for approximately 22% of its
sales revenue and, accordingly, achieves a higher gross margin percentage than
if it purchased its inventory from outside suppliers.
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Selling, general and administrative ("SG&A") costs as a percentage of sales
were 19.1% in fiscal 2000, compared to 18.2% in fiscal 1999 and 18.5% in fiscal
1998. In addition, the Company's distribution business in California, which was
acquired in 1997, has higher overhead costs than would ordinarily be expected,
as the Company has staffed this operation to support a substantial growth rate
over the next several years. The increase in SG&A costs as a percentage of
sales in fiscal 2000 was attributable to costs associated with new branch
operations and personnel employed to support the Company's internal growth
goals. In fiscal 1998, the Company also recorded $580,000 more bad debt expense
than in fiscal 1997, which was largely attributable to the unexpected business
failure of a single customer.
Net energy services income increased 182% from fiscal 1999 to fiscal 2000
after declining 84% from fiscal 1998 to fiscal 1999. The increase in fiscal
2000 was the result of the negotiated termination of the Company's contract with
its last energy services customer and a resolution of unbilled services. The
Company finalized all invoicing in early fiscal 2001.
Interest expense decreased 1% in fiscal 2000 compared to fiscal 1999, after an
increase of 21% in fiscal 1999 compared to fiscal 1998, the result of the
Company's increased borrowings. In fiscal 2000, the decrease was primarily due
to favorable interest rates. In fiscal 2000, 1999 and 1998, interest expense
was 1.6%, 1.7% and 1.8% of sales, respectively. The increases in interest
expense after fiscal 1997 were attributable to indebtedness incurred in
connection with the Company's 1997 acquisitions and several branch openings.
Other non-operating income increased 44% from fiscal 1999 to fiscal 2000, and
49% from fiscal 1998 to fiscal 1999, as the Company has more strictly enforced
its policy to collect finance charges from customers with past due balances.
Current income tax expense consists principally of state income taxes and
federal alternative minimum 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. In fiscal 1998 the Company
determined that a reduction in its deferred tax asset valuation allowance was
appropriate given expectations of higher future taxable income from recently
acquired subsidiaries and, as a result, recorded an additional tax benefit of
$420,000.
Liquidity and Capital Resources
-------------------------------
Working capital increased from $15.6 million in fiscal 1999 to $18.1 million
in fiscal 2000, principally as a result of the Company's earnings through sales
growth. Accounts receivable represented 52 days of gross sales at the end of
fiscal 2000 and 53 days at the end of fiscal 1999. Management directed
resources towards reducing accounts payable, resulting in a decrease of $2.8
million in fiscal 2000 over fiscal 1999. As a result, purchase
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discounts increased by $210,000, or 32% in fiscal 2000 from fiscal 1999
providing an additional benefit to gross margin.
The Company has a revolving line of credit arrangement with a commercial bank
("Bank") pursuant to which, at February 29, 2000, the Company could borrow up to
$18 million. As of February 29, 2000, the Company's available credit under the
facility was approximately $ 1.2 million. In May 2000, the Company and the Bank
amended the underlying loan agreement ("New Agreement") such that the maximum
amount that may be borrowed under the revolving line of credit was increased to
$25 million, including up to $1 million for letters of credit. Pursuant to the
New Agreement, the interest rate on borrowings under the revolving credit
facility is based on either the Bank's prime rate or LIBOR and varies depending
on the Company's leverage ratio, as defined, determined quarterly. As of the
date of the New Agreement, the applicable interest rate was at the prime rate or
LIBOR plus 2.25%. Borrowings under the New Agreement are limited to 85% of
eligible account receivable and 50% of eligible inventory amounts (which
increases to 65% of eligible inventory amounts during certain specified months
of the year). Restrictive covenants of the New Agreement prohibit the Company
from paying dividends, prepaying any subordinated indebtedness or incurring
certain other debt without the Bank's consent, and also require the Company to
maintain certain financial ratios (see Note 4 of Notes to Consolidated Financial
Statements). The New Agreement terminates in May 2003, but is automatically
extended for one-year periods unless either party gives notice of termination to
the other. Prepayment penalties apply if the revolving credit facility is
prepaid during the first two years of the term.
The Company also has mortgage indebtedness to the Bank, which is secured by a
deed of trust on both the land and building occupied by a branch facility in the
Houston area. At February 29, 2000, the note was being repaid in equal monthly
principal installments of $2,400, plus interest. The Company also has a term
loan facility with the Bank to finance capital expenditures. The balance owing
under the term loan facility at February 29, 2000 is being repaid at $7,883
monthly, plus interest, with the unpaid balance due and payable at the end of
February 2002. The New Agreement provides a term loan facility of $4 million
for the purchase of real estate and improvements, including the balance of the
Company's existing mortgage indebtedness to the Bank. The New Agreement further
provides a new capital expenditure term loan facility of $1 million. Borrowings
under the real estate and new capital expenditure term loan facilities are
payable in equal monthly principal installments plus interest over ten years and
five years, respectively. The applicable interest rates vary depending on the
Company's leverage ratio. The New Agreement also provides that the Company may
borrow up to $5 million for the acquisition of other businesses ("Acquisition
Facility"), subject to approval by the Bank of specific transactions.
Borrowings under the Acquisition Facility may be either unsecured or secured by
capital assets of the acquired business. The borrowings are to
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be repaid in equal monthly principal installments over three years, if
unsecured, and seven years, if secured, plus interest at 1/2 to 1% above prime,
or 2 3/4 to 3% over LIBOR.
The Company made capital expenditures of $1,065,000 in fiscal 2000 for
leasehold improvements, computer software, equipment and vehicles under capital
leases. Included in these expenditures was the purchase of additional
production machinery at the Company's manufacturing operations, indicative of
the Company's efforts to expand in its manufacturing capabilities.
The Company has approximately $28.9 million in tax loss carryforwards which
substantially expire by fiscal 2003. Such operating loss 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
carryforwards would be severely restricted.
The Company expects that cash flows from operations and the borrowing
availability under its revolving credit facility will provide sufficient
liquidity to meet its normal operating requirements, debt service and expected
capital expenditures. Subject to limitations set forth in its loan agreement
with the Bank, funds available under the Company's revolving credit facility may
also be utilized to finance acquisitions. Management is also reviewing the
suitability of several acquisition and other business opportunities, but has not
entered into any definitive agreements that would require a material financial
commitment.
Seasonality
-----------
The Company's sales volume and, accordingly, its operating income vary
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 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
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<PAGE>
inflation uniformly affect both the Company and its competitors, and such
increases are passed through to customers as an increase in sales prices.
Year 2000 Issue
---------------
Prior to December 31, 1999, the Company undertook various measures to address
its state of readiness to deal with the problem commonly known as the Year 2000
issue. Such measures included installing an upgrade to its existing integrated
application software and, at one of the Company's subsidiaries that does not use
the Company's integrated software, purchasing new computer hardware and
migrating the subsidiary's computer programs to the new hardware. The costs
incurred by the Company to achieve year 2000 compliance were less than $100,000
and were expensed as incurred.
Upon transitioning to Year 2000 in January 2000, the Company did not
experience any related problems in its internal operations. To date, the
Company has experienced no adverse effects as a result of suppliers, customers
or service providers failing to adequately address the Year 2000 issue and
further received assurances from its most significant suppliers that they were
able to meet customer demands.
While management believes that it took adequate steps to address the Year 2000
issue, there can be no assurance that such problems may not arise in the future.
Should Year 2000 issues ultimately have a material adverse impact on significant
business partners or key parties that provide the country's business and public
service infrastructure, the Company's operations could be similarly affected.
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by Statement of
Financial Accounting Standard No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FAS Statement No.
133" ("SFAS 137") which is effective for fiscal years beginning after June 15,
2000, requires all derivatives to be recognized at fair value on the balance
sheet. The Company plans to adopt SFAS 133 no later than February 28, 2001.
The change is not expected to have a significant effect on the Company's
financial statements.
Safe Harbor Statement
----------------------
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include statements
concerning plans,
-17-
<PAGE>
objectives, goals, strategies, future events or performance and underlying
assumptions and other statements, which are other than statements of historical
facts. Forward-looking statements involve risks and uncertainties, which could
cause actual results or outcomes to differ materially. The Company's
expectations and beliefs are expressed in good faith and are believed by the
Company to have a reasonable basis but there can be no assurance that
management's expectations, beliefs or projections will be achieved or
accomplished. The forward-looking statements in this document are intended to be
subject to the safe harbor protection provided under the securities laws. In
addition to other factors and matters discussed elsewhere herein, the following
are important factors that, in the view of the Company, could cause actual
results to differ materially from those discussed in the forward-looking
statements: the ability of the Company to continue to expand through
acquisitions, the availability of debt or equity capital to fund the Company's
expansion program, unusual weather conditions, the effects of competitive
pricing and general economic conditions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk exposure related to changes in interest
rates on its senior credit facility, which includes revolving credit and term
notes. These instruments carry interest at a pre-agreed upon percentage point
spread from either the prime interest rate or LIBOR. Under its senior credit
facility the Company may, at its option, fix the interest rate for certain
borrowings based on a spread over LIBOR for 30 days to 6 months. At February
29, 2000 the Company had $16.9 million outstanding under its senior credit
facility. Based on this balance, an immediate change of one percent in the
interest rate would cause a change in interest expense of approximately
$169,000, or $.02 per diluted share, on an annual basis.
-18-
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF ACR GROUP, INC. AND SUBSIDIARIES
Page
----
Report of Independent Auditors 20
Consolidated balance sheets as of February 29, 2000 and
February 28, 1999 21
Consolidated statements of operations for the fiscal years
ended February 29, 2000 and February 28, 1999 and 1998 23
Consolidated statements of shareholders' equity for the
fiscal years ended February 29, 2000 and February 28,
1999 and 1998 24
Consolidated statements of cash flows for the fiscal years
ended February 29, 2000 and February 28, 1999 and 1998 25
Notes to Consolidated Financial Statements 27
-19-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To 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, 2000 and February 28, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended February 29, 2000. 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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ACR Group, Inc.
and subsidiaries at February 29, 2000 and February 28, 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 29, 2000, in conformity with accounting
principles generally accepted in the United States. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
May 25, 2000
-20-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of February 29, 2000 and February 28, 1999
ASSETS
------
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 107,035 $ 129,581
Accounts receivable, net of allowance
for doubtful accounts of $532,300 in
2000 and $684,487 in 1999 14,358,891 14,205,827
Inventory 18,445,097 18,449,176
Prepaid expenses and other 386,896 437,860
Deferred income taxes 487,000 487,000
------------ ------------
Total current assets 33,784,919 33,709,444
------------ ------------
Property and equipment, net of
accumulated depreciation 3,689,448 3,695,862
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization
of $693,329 in 2000 and $476,583 in 1999 6,023,207 6,239,953
Other assets 370,929 484,370
------------ ------------
Total assets $44,841,503 $45,102,629
============ ============
</TABLE>
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<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of February 29, 2000 and February 28, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $1,597,790 $1,314,039
Current maturities of capital lease
obligations 190,465 236,179
Accounts payable 12,182,803 14,955,698
Accrued expenses and other liabilities 1,741,710 1,589,688
------------ -------------
Total current liabilities 15,712,768 18,095,604
------------ -------------
Long-term debt 17,303,237 17,394,032
Long-term capital lease obligations 195,615 221,743
------------ -------------
Total liabilities 33,211,620 35,711,379
------------ -------------
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 10,670,634 shares in 2000
and 10,659,303 shares in 1999 106,706 106,593
Additional paid-in capital 41,696,584 41,684,697
Accumulated deficit (30,173,407) (32,400,040)
------------ -------------
Total shareholders' equity 11,629,883 9,391,250
------------ -------------
Total liabilities and shareholders' equity $44,841,503 $45,102,629
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-22-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended February 29, 2000 and February 28, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------------- --------------- --------------
<S> <C> <C> <C>
Sales $126,468,201 $117,886,777 $ 96,164,148
Cost of sales 98,333,567 93,115,088 76,606,033
--------------- --------------- --------------
Gross profit 28,134,634 24,771,689 19,558,115
Selling, general and administrative expenses (24,135,567) (21,494,841) (17,819,076)
Commission income - - 155,380
Energy services income, net 78,401 39,783 169,577
--------------- --------------- --------------
Operating income 4,077,468 3,316,631 2,063,996
Interest expense (2,010,597) (2,036,484) (1,686,830)
Other non-operating income 414,733 288,178 193,319
--------------- --------------- --------------
Income before income taxes 2,481,604 1,568,325 570,485
Provision (benefit) for income taxes:
Current 254,971 153,245 87,119
Deferred - - (420,000)
--------------- --------------- --------------
Net income $ 2,226,633 $ 1,415,080 $ 903,366
=============== =============== ==============
Earnings per common share:
basic $ .21 $ .13 $ .09
=============== =============== ==============
diluted $ .20 $ .12 $ .08
=============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-23-
<PAGE>
ACR GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Fiscal Years Ended February 29, 2000 and February 28, 1999 and 1998
<TABLE>
<CAPTION>
No. of Shares Additional Accumulated
Issued Par Value Paid-In Capital Deficit Total
--------------- ------------ ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1997 10,371,555 $103,716 $41,620,770 ($34,718,486) $7,006,000
Exercise of options 262,462 2,624 (1,570) 1,054
Issuance of warrant 50,000 50,000
Net income 903,366 903,366
--------------- ------------ ------------------ ---------------- ---------------
Balance, February 28, 1998 10,634,017 106,340 41,669,200 (33,815,120) 7,960,420
Exercise of options 25,000 250 13,500 13,750
Exercise of warrant 286 3 (3) -
Issuance of warrant 2,000 2,000
Net income 1,415,080 1,415,080
--------------- ------------ ------------------ ---------------- ---------------
Balance, February 28, 1999 10,659,303 106,593 41,684,697 (32,400,040) 9,391,250
Exercise of warrant 11,331 113 (113) -
Issuance of warrant 12,000 12,000
Net income 2,226,633 2,226,633
--------------- ------------ ------------------ ---------------- ---------------
Balance, February 29, 2000 10,670,634 $106,706 $41,696,584 ($30,173,407) $11,629,883
=============== ============ ================== ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-24-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended February 29, 2000 and February 28, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net income $2,226,633 $1,415,080 $903,366
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 861,342 862,369 826,018
Amortization 291,850 260,151 203,660
Deferred income tax benefit - - (420,000)
Issuance of warrants 12,000 2,000 -
Provision for bad debts 568,465 569,138 832,515
Loss (gain) on sale of assets (19,292) 501 (455)
Changes in operating assets and liabilities:
Accounts receivables (718,317) (2,793,371) (1,931,772)
Inventory 4,079 (1,275,954) (913,528)
Prepaid expenses and other assets 86,089 30,673 (373,327)
Accounts payable (2,772,895) 877,713 2,163,174
Accrued expenses and other liabilities 152,022 410,553 (20,937)
------------- ------------- ------------
Net cash provided by operating activities 691,976 358,853 1,268,714
------------- ------------- ------------
Investing activities:
Acquisition of property and equipment (846,998) (745,810) (659,844)
Acquisition of businesses, net of cash acquired - (383,847) (4,314,882)
Proceeds from disposition of assets 35,148 77,424 270,683
------------- ------------- ------------
Net cash used in investing activities (811,850) (1,052,233) (4,704,043)
------------- ------------- ------------
Financing activities:
Proceeds from long-term debt 1,686,877 2,084,262 7,243,588
Payments on long-term debt (1,589,549) (1,365,051) (4,132,012)
Exercise of stock options - 13,750 1,054
------------- ------------- ------------
Net cash provided by financing activities 97,328 732,961 3,112,630
------------- ------------- ------------
Net increase (decrease) in cash (22,546) 39,581 (322,699)
Cash at beginning of year 129,581 90,000 412,699
------------- ------------- ------------
Cash at end of year $107,035 $129,581 $90,000
============= ============= ============
</TABLE>
(continued)
-25-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended February 29, 2000 and February 28, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------- -------------- --------------
<S> <C> <C> <C>
Schedule of non-cash investing and financing
activities:
Acquisition of subsidiaries:
Fair value of assets acquired - $505,283 $5,740,545
Fair value of liabilities assumed - (111,283) (4,099,618)
Goodwill - 456,000 3,389,970
Notes payable to sellers - 328,253 762,903
Purchase of property and equipment
(net of cash):
For notes payable - 63,540 -
Under capital leases 218,485 98,365 190,239
Sale of assets for note receivable - - 201,136
Supplemental cash flow information:
Interest paid 2,125,482 2,043,789 1,499,458
Federal income taxes paid 35,000 5,900 21,300
</TABLE>
The accompanying notes are an integral part of these financial statements.
-26-
<PAGE>
ACR GROUP, INC. AND SUBSIDIARIES
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 the southeastern United States,
Texas, Nevada, New Mexico, Colorado and southern California. The Company
operates as a single segment.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of ACR Group,
Inc. and its subsidiaries, all of which are wholly owned. 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 merchandise is either shipped or
delivered to the customer.
Energy Services
---------------
Revenues from energy service contracts are recognized when the related
energy cost savings are billed to the user. In fiscal 2000, the Company's
contract with its last energy services customer was terminated. The Company
finalized all invoicing in early fiscal 2001. These revenues are insignificant
to the sales of the Company and are presented net of costs to provide such
services.
-27-
<PAGE>
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 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. The cost of such inventory held in the bonded warehouses was
$11,864,555 at February 29, 2000 and $6,182,556 at February 28, 1999.
The terms of the consignment agreement with the supplier further provide
that the Company must purchase merchandise not sold within a specified period of
time. The Company believes that substantially all consigned merchandise will be
sold in the ordinary course of business before any purchase obligation is
incurred.
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.
Buildings 20-40 years
Leasehold improvements Primary term of the lease
Furniture and fixtures 5-7 years
Vehicles 3-6 years
Other equipment 3-10 years
Goodwill
--------
Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Substantially all goodwill is being amortized
on a straight-line basis over 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 discounted cash flows.
Income Taxes
------------
The Company and its subsidiaries file a consolidated federal income tax
return. The Company uses the liability method in accounting for income taxes.
Under the liability
-28-
<PAGE>
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.
Stock-Based Compensation
------------------------
The Company measures compensation cost for stock-based compensation plans
using the intrinsic value method of accounting.
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.
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by Statement of
Financial Accounting Standard No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FAS Statement No.
133" ("SFAS 137") which is effective for fiscal years beginning after June 15,
2000, requires all derivatives to be recognized at fair value on the balance
sheet. The Company plans to adopt SFAS 133 no later than February 28, 2001.
The change is not expected to have a significant effect on the Company's
financial statements.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 establishes criteria for determining which
costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. The Company adopted SOP 98-
1 prospectively effective March 1, 1999. In April 1998, the AcSEC issued SOP
98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 establishes
standards for the reporting and disclosure of start-up costs, including
organization costs. The Company adopted SOP 98-5 on March 1, 1999. The
adoption of these statements did not have a material effect on the Company's
consolidated financial position or results of operations.
-29-
<PAGE>
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, which was paid in full at closing by the
Company's subsidiary. The Note is to be repaid in three annual principal
installments of $400,000 each, plus accrued interest at the prime rate plus
1/2%, beginning August 31, 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 4).
In January 1999, the Company, through a wholly owned subsidiary, entered
into a Purchase Agreement pursuant to which it acquired all of the issued and
outstanding capital stock of Beaumont A/C Supply, Inc. ("BACS"), a Texas
corporation for $850,000. As consideration for the acquisition, the Company
paid $521,747 cash and issued a promissory note for $328,253. The note shall be
due and payable in 12 quarterly installments of principal and interest
commencing March 31, 1999. The excess of the final purchase price over the
estimated fair value of the net assets acquired was $456,000, which was recorded
as goodwill. Pro forma results of operations relating to this acquisition are
not presented because the effects of the acquisition would not be material.
The acquisitions described above were accounted for using the purchase
method of accounting, and the consolidated financial statements include the
operating results from the respective dates of acquisition. Unaudited pro forma
results of the Company's operations for the year ended February 28, 1998 as if
the acquisition of CHS occurred as of the beginning of fiscal 1998, are as
follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Sales $105,633,688
Net income 993,846
Earnings per common share:
Basic 0.10
Diluted 0.08
</TABLE>
These pro forma results are presented for comparative purposes only and
include certain adjustments to give effect to interest expense on acquisition
debt, amortization of goodwill and additional depreciation expense as a result
of a step-up in the basis of fixed
-30-
<PAGE>
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 operations of
the consolidated entities.
3 - Property and Equipment
----------------------
Property and equipment consisted of the following at the end of February:
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Land $224,593 $224,593
Building and leasehold improvements 1,830,967 1,654,758
Furniture and fixtures 205,029 202,525
Vehicles 1,462,752 1,530,580
Other equipment 3,576,185 3,197,891
Energy management equipment 223,111 223,111
----------- ----------
7,522,637 7,033,458
Less accumulated depreciation (3,833,189) (3,337,596)
----------- ----------
Net property and equipment $3,689,448 $3,695,862
=========== ==========
</TABLE>
Capitalized lease assets of $1,126,627 and $1,171,694 together with
accumulated amortization of $620,762 and $627,811 are included in property and
equipment as of February 29, 2000 and February 28, 1999, respectively.
Amortization expense is included with depreciation expense.
4 - Debt
----
Debt is summarized as follows at the end of February:
-31-
<PAGE>
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revolving line of credit $16,086,710 $14,579,715
Notes payable - Catalyst Fund and affiliate 1,466,559 1,929,059
Notes payable to sellers of companies
acquired (note 2) 742,604 1,421,622
Real estate loan 295,020 323,820
Equipment term loan 252,255 346,851
Other 57,879 107,004
----------- -----------
18,901,027 18,708,071
Less current maturities (1,597,790) (1,314,039)
----------- -----------
Long-term debt, less current maturities $17,303,237 $17,394,032
=========== ===========
</TABLE>
The Company has a revolving line of credit arrangement with a commercial
bank ("Bank") pursuant to which, at February 29, 2000, the Company could borrow
up to $18 million. Borrowings under the facility bear interest, at the Company's
option, at either the Bank's prime rate plus 1/2% or LIBOR plus 3%, payable
monthly. At February 29, 2000, the Company had elected the prime rate option
(8.50%) for all available amounts under the facility. As of February 29, 2000,
the Company's available credit under the facility was approximately $ 1.2
million. In May 2000, the Company and the Bank amended the underlying loan
agreement ("New Agreement") such that the maximum amount that may be borrowed
under the revolving line of credit was increased to $25 million, including up to
$1 million for letters of credit. Pursuant to the New Agreement, the interest
rate on borrowings under the revolving credit facility is based on either the
Bank's prime rate or LIBOR and varies depending on the Company's leverage ratio,
as defined, determined quarterly. As of the date of the New Agreement, the
applicable interest rate was at the prime rate or LIBOR plus 2.25%. Borrowings
under the New Agreement are limited to 85% of eligible account receivable and
50% of eligible inventory amounts (which increases to 65% of eligible inventory
amounts during certain specified months of the year). Restrictive covenants of
the New Agreement prohibit the Company from paying dividends, prepaying any
subordinated indebtedness or incurring certain other debt without the Bank's
consent, and also require the Company to maintain certain financial ratios.
The New Agreement terminates in May 2003, but is automatically extended for one-
year periods unless either party gives notice of termination to the other.
Prepayment penalties apply if the revolving credit facility is prepaid during
the first two years of the term.
In January 1998, the Company obtained loans aggregating $1.54 million from
The Catalyst Fund, Ltd. ("Catalyst") and an affiliate of Catalyst to pay certain
outstanding indebtedness to St. James Capital Partners, L.P. ("St. James"), and
also borrowed
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<PAGE>
$450,000 from Catalyst for an acquisition. The Company previously borrowed $1
million from Catalyst in 1993. Such borrowings all bear interest at 12 1/2% per
annum, payable monthly, and have varying principal repayment schedules. The
aggregate outstanding principal at February 29, 2000 is to be repaid in monthly
installments of $48,750 from September 1999 through August 2001 and $30,000 from
September 2001 through January 2003. The Catalyst loans are all secured by the
stock and operating assets of certain of the Company's subsidiaries and an
assignment of proceeds from life insurance policies on the Company's President.
Catalyst has subordinated its security interests to the Bank. In connection with
the January 1998 loans, the Company granted Catalyst a warrant to purchase
175,000 shares of the Company's common stock at a price of $2.06 per share,
exercisable at any time before February 28, 2003. The proceeds of the January
1998 loans were allocated between the debt and the warrant, resulting in a debt
discount of $50,000, which is being amortized to expense over the term of the
loan. In connection with the 1993 loan, the Company granted Catalyst a warrant
to purchase 1,000,000 shares of the Company's common stock at a price of $0.59
per share and, in connection with the amendment to the repayment schedule of the
1993 loan during fiscal 1998, the expiration date of the warrant was extended
until February 28, 2003 (see Note 7). Covenants of the Company's loan agreement
with Catalyst, which covers all of the Catalyst loans, prohibit dividends and
restrict additional borrowings without Catalyst's consent, and also require the
Company to maintain specified financial ratios.
The notes payable to sellers include debt incurred in connection with three
acquisitions from fiscal 1996 to fiscal 1999 and are payable in installments
over terms of three to five years. Such notes bear interest at rates from prime
plus 1/2% (9.00% at February 29, 2000) to 10%. Certain seller notes are secured
by a first lien on certain production machinery and real property. All of the
notes payable to sellers are subordinated to the Company's indebtedness to the
Bank.
The Company also has mortgage indebtedness to the Bank, which is secured by
a deed of trust on both the land and building occupied by a branch facility in
the Houston area. At February 29, 2000 the note was being repaid in equal
monthly principal installments of $2,400, plus interest. The Company also has a
term loan facility with the Bank to finance capital expenditures. The balance
owing under the term loan facility at February 29, 2000 is being repaid at
$7,883 monthly, plus interest, with the unpaid balance due and payable at the
end of February 2002. The New Agreement provides a term loan facility of $4
million for the purchase of real estate and improvements, including the balance
of the Company's existing mortgage indebtedness to the Bank. The New Agreement
further provides a new capital expenditure term loan facility of $1 million.
Borrowings under the real estate and new capital expenditure term loan
facilities are payable in equal monthly principal installments plus interest
over ten years and five years, respectively. The applicable interest rates vary
depending on the Company's leverage ratio. The New Agreement also provides that
the Company may borrow up to $5 million
-33-
<PAGE>
for the acquisition of other businesses ("Acquisition Facility"), subject to
approval by the Bank of specific transactions. Borrowings under the Acquisition
Facility may be either unsecured or secured by capital assets of the acquired
business. The borrowings are to be repaid in equal monthly principal
installments over three years, if unsecured, and seven years, if secured, plus
interest at 1/2 to 1% above prime, or 2 3/4 to 3% over LIBOR.
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 $1,597,790 in 2001, $16,860,480 in 2002, and
$442,757 in 2003.
-34-
<PAGE>
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>
Capital lease
Year ending February 29 or 28, payments
------------------------------ -------------
<S> <C> <C>
2001 $208,693
2002 97,257
2003 66,622
2004 29,122
2005 6,414
--------
Total minimum lease payments 408,108
Less amounts representing interest (22,028)
--------
Present value of future minimum lease payments 386,080
Less current maturities of capital lease obligations (190,465)
--------
Long-term obligations under capital leases $195,615
========
</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 2009. The leases for its branch facilities 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: $3,168,182 in 2001, $2,578,393 in 2002, $2,084,217 in 2003,
$1,582,891 in 2004, $885,796 in 2005 and $1,204,470 after 2005.
Rental expenses were $3,012,236, $2,414,026 and $1,800,350 in 2000, 1999
and 1998, respectively.
6 - Income Taxes
------------
The Company recognizes 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 is established against the deferred
tax asset. The deferred tax asset is
-35-
<PAGE>
classified as current to the extent that a tax benefit is expected to be
realized in the next fiscal period. 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 29 or 28,
---------------------------------------------------
2000 1999 1998
----------- ----------- ------------
<S> <C> <C> <C>
Tax at statutory rate $843,745 $533,231 $193,965
Increase (reduction) in tax expense
resulting from:
Change in valuation allowance (1,558,282) (588,631) (650,299)
Nondeductible expenses 80,531 61,288 57,868
Expired tax credits and other 888,977 147,357 65,585
---------- -------- ---------
Actual income tax provision (benefit) $254,971 $153,245 ($332,881)
========== ======== =========
</TABLE>
As of February 29, 2000 and February 28, 1999, the Company had net
operating loss carryforwards of $28.9 million and $31.5 million, respectively,
which are available to offset future taxable income, substantially all of such
carryforwards will expire by 2003. In addition, as of February 28, 1999, the
Company had investment and research and development tax credit carryforwards of
approximately $0.8 million which expired during fiscal 2000. For financial
reporting purposes, the Company has recognized a valuation allowance of $9.0
million and $10.6 million as of February 29, 2000 and February 28, 1999,
respectively, to offset the deferred tax assets related primarily to the loss
carryforward and the credit carryforwards. The decrease in the valuation
allowance for fiscal 1998, 1999 and 2000 was principally due to the recognition
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, 2000.
7 - Stock Option Agreements and Equity Transactions
-----------------------------------------------
Pursuant to an employment contract that expired February 28, 1998, the
President of the Company was granted 125,000 shares of the Company's common
stock ("Stock"), valued at $125,000, during fiscal 1997. In addition, he
received options to purchase 125,000 shares of Stock which are presently
exercisable at prices from $.76 to $2.81 per share and expire from May 1999 to
June 2002. During fiscal 1998, the President exercised options for 8,437 shares
at $.13 per share and 325,000 shares at $.49 per
-36-
<PAGE>
share in a cashless exercise that resulted in the issuance of 254,025 shares of
Stock. During fiscal 2000, the President exercised options for 25,000 shares at
$.76 per share in a cashless exercise that resulted in the issuance of 11,331
shares of Stock. Effective March 1, 1998, both the President and the Chief
Financial Officer of the Company entered into employment contracts that expire
February 28, 2002 and in connection therewith, were granted options to purchase
300,000 and 100,000 shares of Stock, respectively, at $2.24 per share. Such
options vest on March 1, 2006. The option agreements further provide for
accelerated vesting if the market price of Stock, as defined in the agreements,
reaches specified levels prior to the stated vesting date.
In connection with its financing provided to the Company, St. James
received a warrant to acquire 280,000 shares of the Company's common stock at an
exercise price of $1.625 per share, exercisable at any time before January 2002.
In connection with its loan to the Company, Catalyst received a warrant to
purchase 1,000,000 shares of the Company's common stock at a price of $.59 per
share, exercisable at any time before February 2003. See Note 4. In connection
with a January 1998 loan to the Company (see Note 4) Catalyst and an affiliate
received warrants to purchase an aggregate of 175,000 shares of the Company's
common stock at a price of $2.06 per share, exercisable at any time before
February 2003. Certain of these warrants outstanding, pursuant to which
1,175,000 shares of common stock may be acquired, contain a put option under
certain limited circumstances. The features enabling the holder to exercise the
put option are either within management's control or, at the Company's option,
provide for a net cash or net share (non-redeemable preferred shares with a
defined coupon rate) settlement.
During fiscal 1999, the Company engaged Magnum Financial Group, L.L.C.
("Magnum") to promote interest in the Company's equity securities. In
connection with these activities, Magnum received warrants to acquire 75,000
shares of the Company's common stock with exercise prices for 25,000 shares each
at $2.50, $3.00 and $3.50 per share. The warrants are immediately vested and
can be exercised at any time before December 2001. The weighted average fair
value of the warrants at the date of grant was approximately $.20 per share and
is being recognized as compensation expense over the service period.
In fiscal 1997, the Company established the 1996 Stock Option Plan for key
employees and directors of the Company and its subsidiaries. The plan provides
for granting up to 500,000 non-qualified and/or incentive stock options.
161,500 and 134,500 options were granted in fiscal 2000 and 1998 respectively
(none in fiscal year 1997 or 1999) of which 24,000 and 19,500 expired in fiscal
2000 and 1999, respectively, and 247,500 shares of common stock were available
for future grants at February 29, 2000. Options granted under the plan are
immediately vested.
-37-
<PAGE>
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
Year Ended February 29 or 28,
---------------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ---------- -------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 655,000 $2.18 299,500 $1.96 423,437 $0.53
Granted 161,500 1.50 410,000 2.24 209,500 2.51
Exercised (25,000) 0.76 (25,000) 0.55 (333,437) 0.48
Forfeited (24,000) 1.73 (29,500) 2.29 - -
------- -------- --------
Outstanding - end of year 767,500 2.09 655,000 2.18 299,500 1.96
Exercisable - end of year 199,667 2.17 201,667 1.96 200,000 1.69
Weighted average fair value of
options granted during year $0.85 $1.58 $1.38
</TABLE>
40,000 and 584,500 options outstanding at February 29, 2000 have a weighted
average exercise price of $.74 and $2.35 per share with ranges from $.70 to $.77
and $1.88 to $2.81 per share. These options have a weighted average contractual
life remaining of less than one year and 3.5 years. 143,000 options outstanding
at February 29, 2000 have a weighted average exercise price of $1.50 per share
and a weighted average contractual life remaining of 4.1 years.
Pro forma information has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS No. 123. The
fair value of these options was estimated at the date of grant using a Black-
Scholes option pricing model. For options granted during fiscal 2000, 1999 and
1998, the following assumptions were used:
- Expected life of 5 to 8 years
- No expected dividend yield
- Expected volatility of .610 in fiscal 2000 and 1999 with .622 in fiscal
1998
- Risk-free interest rate of 5.0%
The Company's pro forma information follows:
-38-
<PAGE>
<TABLE>
<CAPTION>
Year Ended February 29 or 28,
--------------------------------------------------
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Pro forma net income $2,081,672 $1,284,244 $738,487
Pro forma basic earnings per share $0.20 $0.12 $0.07
Pro forma diluted earnings per share $0.18 $0.11 $0.06
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, these models require the input of
highly subjective assumptions including the expected stock price volatility.
Because of these inherent assumptions, the existing models do not necessarily
provide a reliable single measure of the fair value of the Company's employee
stock options. As a result of the above factors, possible future grants and the
vesting provisions of the Company's stock options, the pro forma results would
not necessarily be representative of the effects on reported net income for
future years.
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 $198,784, $171,786 and $138,416 for fiscal 2000, 1999 and 1998,
respectively.
9 - Earnings per Share
------------------
The numerator used in the calculations of both basic and diluted earnings
per share for all periods presented was net income. The denominator for each
period presented was determined as follows:
-39-
<PAGE>
<TABLE>
<CAPTION>
Year Ended February 29 or 28,
--------------------------------------------------------
2000 1999 1998
------------ ------------- -------------
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per share -
weighted average shares 10,667,801 10,637,123 10,376,886
Effect of dilutive securities:
Employee stock options 21,819 49,245 268,842
Warrants 582,495 665,431 912,280
Convertible debt - - 452,483
------------ ------------- -------------
Dilutive potential common shares 604,314 714,676 1,633,605
------------ ------------- -------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 11,272,115 11,351,799 12,010,491
============ ============= =============
</TABLE>
10 - Quarterly Results (Unaudited)
-----------------------------
<TABLE>
<CAPTION>
In thousands of dollars
(except per share amounts) Quarter
--------------------------------------------------------
First Second Third Fourth
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal Year Ended February 29, 2000
-----------------------------------
Sales $33,206 $38,107 $29,198 $25,957
Gross Profit 7,196 8,278 6,660 6,001
Net Income 652 1,614 381 (420)
Earnings Per Common Share:
Basic 0.06 0.15 0.04 (0.04)
Diluted 0.06 0.14 0.03 (0.04)
Fiscal Year Ended February 28, 1999
-----------------------------------
Sales 28,152 36,843 27,676 25,216
Gross Profit 5,818 7,510 5,936 5,508
Net Income 385 1,267 329 (566)
Earnings Per Common Share:
Basic 0.04 0.12 0.03 (0.05)
Diluted 0.03 0.11 0.03 (0.05)
</TABLE>
-40-
<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.
-41-
<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, 2000 and February 28, 1999 and 1998 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)
Annual Report on Form 10-K for fiscal year ended June 30, 1991 (referred to as
"1991 10-K"), or (b) Annual Report on Form 10-K for fiscal year ended February
28, 1993 (referred to as "1993 10-K"), or (c) Form S-8 Registration Statement
under the 1933 Act for Registrant, Registration No. 333-16325 filed November 18,
1996 (referred to as "RS 333-16325"), or (d) Current Report on Form 8-K dated
January 24, 1997, or (e) Annual Report on Form 10-K for fiscal year ended
February 28, 1997 (referred to as "1997 10-K"), or (f) Form 10-Q for quarter
ended August 31, 1997 (referred to as "August 31, 1997 10-Q"), or (g) Annual
Report on Form 10-K for fiscal year ended February 28, 1998 (referred to as
"1998 10-K").
-42-
<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 Employment Agreement between the Company and Alex Trevino,
Jr. dated as of March 1, 1998 (Exhibit 10.1 to 1998 10-K)
*10.2 Stock Option Agreement between the Company and Alex Trevino,
Jr. dated as of March 1, 1998 (Exhibit 10.2 to 1998
10-K)
*10.3 Employment Agreement between the Company and Anthony R.
Maresca dated as of March 1, 1998 (Exhibit 10.3 to 1998 10-
K)
*10.4 Stock Option Agreement between the Company and Anthony R.
Maresca dated as of March 1, 1998 (Exhibit 10.4 to 1998 10-
K)
*10.5 Registration Rights Agreement by and between the Company,
Alex Trevino, Jr. and Anthony R. Maresca (Exhibit 10.5 to
1998 10-K)
*10.6 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)
-43-
<PAGE>
*10.7 First Amendment to Note Agreement by and among The
Catalyst Fund, Ltd., the Company, ACR Supply, Inc., Total
Supply, Inc. f/k/a Fabricated Systems, Inc., Heating and
Cooling Supply, Inc. and West Coast HVAC Supply, Inc., dated
as of April 14, 1997 (Exhibit 10.7 to 1998 10-K)
*10.8 Second Amendment and Restated Note Agreement by and
between the Company, all subsidiaries of the Company, The
Catalyst Fund, Ltd., and Southwest/Catalyst Capital, Ltd.,
dated as of January 28, 1998 (Exhibit 10.8 to 1998 10-K)
*10.9 Warrant for the Purchase of 750,000 Shares of Common Stock
of the Company issued to The Catalyst Fund, Ltd. dated
January 28, 1998 (Exhibit 10.9 to 1998 10-K)
*10.10 Warrant for the Purchase of 50,000 Shares of Common Stock
of the Company issued to The Catalyst Fund, Ltd. dated
January 28, 1998 (Exhibit 10.10 to 1998 10-K)
*10.11 Warrant for the Purchase of 125,000 Shares of Common Stock
of the Company issued to Southwest/Catalyst Capital, Ltd.
dated January 28, 1998 (Exhibit 10.11 to 1998 10-K)
*10.12 Registration Rights Agreement between The Catalyst Fund,
Ltd. and the Company dated as of January 28, 1998 (Exhibit
10.12 to 1998 10-K)
*10.13 Registration Rights Agreement between Southwest/Catalyst
Capital, Ltd. and the Company dated as of January 28, 1998
(Exhibit 10.13 to 1998 10-K)
*10.14 Loan and Security Agreement between the Company and
NationsBank of Texas, N.A. dated as of August 27, 1997
(Exhibit 10.1 to August 31, 1997 10-Q)
*10.15 First Amendment to Loan and Security Agreement by and
between the Company and NationsBank of Texas, N.A. dated as
of September 9, 1997 (Exhibit 10.2 to August 31, 1997 10-Q)
-44-
<PAGE>
10.15A Amended and restated Loan and Security Agreement between
the Company and Bank of America, N.A. dated as of May 25,
2000.
*10.16 Purchase Agreement by and among the Company, Richard
O'Leary, Lifetime Filter, Inc. and O'Leary Family
Partnership, Ltd. (Exhibit 2.1 to Form 8-K dated January 24,
1997)
*10.17 1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS
333-16325)
*10.18 Agreement of Purchase and Sale by and between the Company
and St. James Capital Partners, L.P. dated as of January 24,
1997 (Exhibit 10.15 to 1997 10-K)
*10.19 10% Convertible Promissory Note of the Company issued to
St. James Capital Partners, L.P. dated as of January 24,
1997 (Exhibit 10.16 to 1997 10-K)
*10.20 Warrant to Purchase 280,000 Shares of Common Stock of the
Company issued to St. James Capital Partners, L.P. dated
January 24, 1997 (Exhibit 10.17 to 1997 10-K)
*10.21 Registration Rights Agreement between St. James Capital
Partners, L.P. and the Company dated as of January 24, 1997
(Exhibit 10.18 to 1997 10-K)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the period from December
1, 1999 to February 29, 2000.
(c) Exhibits
See Item 14(a)(3), above.
(d) Financial Statement Schedule
-45-
<PAGE>
SCHEDULE II
ACR GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended February 29, 2000 and February 28, 1999 and 1998
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
----------- --------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended February 29, 2000:
Allowance for doubtful accounts:
Accounts receivable $684,487 $568,465 $ -- $720,652 (1) $532,300
Year ended February 28, 1999:
Allowance for doubtful accounts:
Accounts receivable 762,709 569,138 9,931 (2) 657,291 (1) 684,487
Year ended February 28, 1998:
Allowance for doubtful accounts:
Accounts receivable 584,024 832,515 108,355 762,185 (1) 762,709
</TABLE>
(1) Accounts/notes and related allowance written off.
(2) Allowance related to accounts receivable of acquired companies.
-46-
<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 26, 2000 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 26, 2000
---------------------- President and
Alex Trevino, Jr. Chief Executive Officer
(Principal executive officer)
/s/ Anthony R. Maresca Senior Vice President, May 26, 2000
---------------------- Chief Financial Officer
Anthony R. Maresca and Director
(Principal financial and
accounting officer)
/s/ Ronald T. Nixon Director May 26, 2000
----------------------
Ronald T. Nixon
/s/ Roland H. St. Cyr Director May 26, 2000
----------------------
Roland H. St. Cyr
/s/ A. Stephen Trevino Director May 26, 2000
----------------------
A. Stephen Trevino
-47-
<PAGE>
EXHIBIT INDEX
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 Employment Agreement between the Company and Alex Trevino,
Jr. dated as of March 1, 1998 (Exhibit 10.1 to 1998 10-K)
*10.2 Stock Option Agreement between the Company and Alex
Trevino, Jr. dated as of March 1, 1998 (Exhibit 10.2 to 1998
10-K)
*10.3 Employment Agreement between the Company and Anthony R.
Maresca dated as of March 1, 1998 (Exhibit 10.3 to 1998 10-
K)
*10.4 Stock Option Agreement between the Company and Anthony R.
Maresca dated as of March 1, 1998 (Exhibit 10.4 to 1998 10-
K)
*10.5 Registration Rights Agreement by and between the Company,
Alex Trevino, Jr. and Anthony R. Maresca (Exhibit 10.5 to
1998 10-K)
*10.6 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)
*10.7 First Amendment to Note Agreement by and among The
Catalyst Fund, Ltd., the Company, ACR Supply, Inc., Total
-48-
<PAGE>
Supply, Inc. f/k/a Fabricated Systems, Inc., Heating and
Cooling Supply, Inc. and West Coast HVAC Supply, Inc., dated
as of April 14, 1997 (Exhibit 10.7 to 1998 10-K)
*10.8 Second Amendment and Restated Note Agreement by and
between the Company, all subsidiaries of the Company, The
Catalyst Fund, Ltd., and Southwest/Catalyst Capital, Ltd.,
dated as of January 28, 1998 (Exhibit 10.8 to 1998 10-K)
*10.9 Warrant for the Purchase of 750,000 Shares of Common Stock
of the Company issued to The Catalyst Fund, Ltd. dated
January 28, 1998 (Exhibit 10.9 to 1998 10-K)
*10.10 Warrant for the Purchase of 50,000 Shares of Common Stock
of the Company issued to The Catalyst Fund, Ltd. dated
January 28, 1998 (Exhibit 10.10 to 1998 10-K)
*10.11 Warrant for the Purchase of 125,000 Shares of Common Stock
of the Company issued to Southwest/Catalyst Capital, Ltd.
dated January 28, 1998 (Exhibit 10.11 to 1998 10-K)
*10.12 Registration Rights Agreement between The Catalyst Fund,
Ltd. and the Company dated as of January 28, 1998 (Exhibit
10.12 to 1998 10-K)
*10.13 Registration Rights Agreement between Southwest/Catalyst
Capital, Ltd. and the Company dated as of January 28, 1998
(Exhibit 10.13 to 1998 10-K)
*10.14 Loan and Security Agreement between the Company and
NationsBank of Texas, N.A. dated as of August 27, 1997
(Exhibit 10.1 to August 31, 1997 10-Q)
*10.15 First Amendment to Loan and Security Agreement by and
between the Company and NationsBank of Texas, N.A. dated as
of September 9, 1997 (Exhibit 10.2 to August 31, 1997 10-Q)
10.15A Amended and restated Loan and Security Agreement between
the Company and Bank of America, N.A. dated as of May 25,
2000.
*10.16 Purchase Agreement by and among the Company, Richard
O'Leary, Lifetime Filter, Inc. and O'Leary Family
Partnership, Ltd. (Exhibit 2.1 to Form 8-K dated January 24,
1997)
-49-
<PAGE>
*10.17 1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS
333-16325)
*10.18 Agreement of Purchase and Sale by and between the Company
and St. James Capital Partners, L.P. dated as of January 24,
1997 (Exhibit 10.15 to 1997 10-K)
*10.19 10% Convertible Promissory Note of the Company issued to
St. James Capital Partners, L.P. dated as of January 24,
1997 (Exhibit 10.16 to 1997 10-K)
*10.20 Warrant to Purchase 280,000 Shares of Common Stock of the
Company issued to St. James Capital Partners, L.P. dated
January 24, 1997 (Exhibit 10.17 to 1997 10-K)
*10.21 Registration Rights Agreement between St. James Capital
Partners, L.P. and the Company dated as of January 24, 1997
(Exhibit 10.18 to 1997 10-K)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
-50-
