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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
February 28, 1997 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
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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. [ ]
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The aggregate market value of the common stock held by nonaffiliates
of the registrant on April 30, 1997 was $23,302,056. The aggregate market
value was computed by reference to the last trading price as reported on the
National Association of Securities Dealers Automated Quotation System. For the
purposes of this response, Executive Officers, Directors and holders of more
than 10% of the Registrant's common stock are considered affiliates of the
registrant.
The number of shares outstanding of the registrant's common stock as
of April 30, 1997: 10,371,555 shares
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in August 1997 is incorporated by reference in answer
to Part III of this report.
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of
Security-Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 20
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
ACR Group, Inc. (which, together with its subsidiaries is herein
referred to as the "Company" or "ACRG") is a Texas corporation based in
Houston. In 1990, the Company began to acquire and operate businesses engaged
in the wholesale distribution of heating, ventilating, air conditioning and
refrigeration ("HVACR") equipment and supplies. The Company acquired its first
operating company in 1990. Since 1990, ACRG has acquired or started up seven
additional HVACR distribution companies and now has 31 branch operations in
seven 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, both through 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 provides a cushion
against economic swings. The aftermarket is far less susceptible to changes in
economic conditions than the new construction market and now represents
approximately 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.
Investments in HVACR Distribution Companies:
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 1997, ACRS had twelve branches in Texas and one in
Louisiana. Most of ACRS's branches have attained market share
leadership in their respective areas. In major metropolitan areas such
as San Antonio and Houston, ACRS encounters significantly more
competition than in smaller cities. However, through aggressive sales
efforts, the Houston branches have achieved a significant, but not
dominant, share of their local HVACR markets. The company has yet to
achieve a significant market share in either San Antonio or McAllen,
Texas. In May 1997, ACRS opened its fourteenth
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branch in College Station, Texas.
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 35% equipment and
65% 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 the company's capabilities in both the plan and
specifications market and the specialty products market. HCS's
proficiency in these two niches distinguishes it from most other HVACR
distributors and, as a result, sales to commercial accounts were
approximately 40% of total sales at the end of fiscal 1997.
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 the Atlanta trade area. In 1995, TSI acquired a small
distributor in south Georgia, which gave the company 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 68% equipment
and 32% parts and supplies.
TSI has four branches located in the Atlanta metropolitan area, one
branch in Warner-Robins, a suburb of Macon, and one branch in Valdosta
in far south 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 which
ceased business operations. VSI employs most of the key personnel
from that former GMC distributor. Although sales of GMC equipment
initially comprised virtually all of VSI's sales, management has
continuously emphasized increasing the breadth of higher profit HVACR
parts and supplies stocked at VSI. Approximately 78% of VSI's sales
consisted of GMC equipment in fiscal 1997. In fiscal 1997, the
Company opened a second branch of VSI in Memphis to serve the southern
section of the city and the north Mississippi trade area.
Ener-Tech Industries, Inc.
Effective January 1, 1996, the Company acquired Ener-Tech Industries,
Inc. ("ETI"), an HVACR distributor with one branch in Nashville,
Tennessee. Unlike the Company's other HVACR distribution operations,
ETI specializes in an industry segment. ETI sells controls and
control systems to commercial and industrial end-users, HVACR
contractors, dealers and other distributors. ETI also designs and
assembles control systems used in commercial applications such as
hospitals, restaurants and supermarkets. Such control systems perform
a variety of functions including temperature control and monitoring,
lighting control and energy management.
ETI is an authorized distributor for Honeywell, Inc. for much of
Tennessee and parts of Kentucky. By providing engineering services
and assembly processes for its customers in connection with the sale
of control systems, ETI obtains a higher gross margin on its sales
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. In fiscal 1997, a branch of ETI was
opened in the same physical location as the south Memphis branch of
VSI.
Florida Cooling Supply, Inc.
In March 1996, the Company organized Florida Cooling Supply, Inc.
("FCS") and in April 1996, opened four branch operations in central
Florida. The state of Florida is among the three largest in the
United States in terms of installed HVACR systems. FCS is managed by
two persons with extensive industry experience in FCS's trade area.
During fiscal 1997, FCS closed one of the initial four branches, and
in May
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1997, opened a new branch in Tampa.
Lifetime Filter, Inc.
Effective as of January 1, 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
expects to augment LFI's sales by distributing LFI's filters
throughout the Company's existing wholesale distribution network.
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. ACRG did not install any new Systems after 1985. 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 all expired during fiscal 1996,
but the Company continues to manage 13 Systems for a single customer on a month
to month basis. The Company cannot predict for how long such an informal
arrangement may continue.
Executive Officers of the Registrant
The Company's executive officers are as follows:
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Name Age Position with the Company
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Alex Trevino, Jr. 60 Chairman of the Board and President
Anthony R. Maresca 46 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.
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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 28, 1997, the Company and its subsidiaries had
approximately 195 full-time employees. In addition, LFI had approximately 15
workers who are leased from a national staff leasing company. In May 1997,
these workers became employees of LFI. Neither the Company nor its
subsidiaries routinely use temporary labor. None of the Company's employees are
represented by any collective bargaining units. Management considers the
Company's relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company and its subsidiaries occupy office and warehouse space
under operating leases with various terms. Generally, a branch location will
contain 10,000 to 20,000 square feet of showroom and warehouse space. Branch
locations that include a subsidiary's corporate office will be larger. The
Company owns the facility occupied by the Pasadena, Texas branch of ACRS.
During fiscal 1997, the Company acquired land in Las Vegas, Nevada and in
Temple, Texas for the purpose of constructing buildings to replace the existing
leased premises. The Company expects to sell each of the properties to parties
who would construct office/warehouse buildings according to the Company's
specifications and lease them to the Company under long-term arrangements.
ITEM 3. LEGAL PROCEEDINGS.
As of February 28, 1997 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 28, 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock trades on the NASDAQ small-cap market under
the symbol "ACRG." The table below sets forth the high and low sales prices
based upon actual transactions.
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High Low
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Fiscal Year 1997
1st quarter ended 5/31/96 $ 13/16 $ 9/16
2nd quarter ended 8/31/96 1 1/8 9/16
3rd quarter ended 11/30/96 2 7/8
4th quarter ended 2/28/97 2 15/16 1 5/8
Fiscal Year 1996
1st quarter ended 5/31/95 $1 1/16 $ 21/32
2nd quarter ended 8/31/95 13/16 5/8
3rd quarter ended 11/30/95 7/8 1/2
4th quarter ended 2/29/96 13/16 1/2
</TABLE>
As of April 30, 1997, there were 541 holders of record of the
Company's common stock. This number does not include the beneficial owners of
shares held in the name of a broker or nominee.
The Company has never declared or paid cash dividends on its common
stock. The Company's loan agreements with two lenders each expressly prohibit
the payment of dividends by the Company. See Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources, and Note 4 of Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Company have been derived
from the consolidated financial statements. This summary should be read in
conjunction with the consolidated financial statements and related notes
included in Item 8 of this Report. As of February 28, 1993, the Company
acquired ACR Supply, Inc.; the accounts of ACRS are consolidated in the Balance
Sheet Data presented herein as of such date. The results of operations of ACRS
are included in the Income Statement Data only for the fiscal years ending
after February 28, 1993. Effective March 1, 1993, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 109 with respect to
accounting for income taxes. As a result of implementing SFAS 109, $680,000
was included in net income in fiscal 1994 as the cumulative effect on prior
periods. The Company has never paid any dividends.
The Company has not recorded a provision for income taxes other than
alternative minimum taxes and state income taxes for fiscal years 1994 through
1997 because of previously incurred net operating losses for which a tax
benefit had not previously been recorded. Additionally, the Company determined
in the fourth quarter of fiscal 1997 that a further reduction in the deferred
tax asset valuation allowance was appropriate given expectations of higher
future taxable income and, as a result, recorded an additional tax benefit of
$360,000.
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(In thousands except per share data)
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Year Ended February 28 or 29, Year Ended
--------------------------------------------------------- June 30,
Income Statement Data: 1997 1996 1995 1994 1993 * 1992
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Sales $ 78,371 $ 56,500 $ 41,281 $ 30,862 $ 3,192 $ 5,900
Gross profit 15,085 10,721 8,563 6,738 807 1,334
Operating income (loss) 1,659 765 945 615 185 (635)
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Income (loss) before income
taxes, extraordinary item
and cumulative effect of
an accounting change 887 199 562 443 219 (267)
(Provision) benefit for
income taxes 258 (15) (4) (9) (71) --
Extraordinary item -- -- -- -- 71 --
Cumulative effect of an
accounting change -- -- -- 680 -- --
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Net income (loss) $ 1,145 $ 184 $ 558 $ 1,114 $ 219 $ (267)
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Amounts per share**:
Earnings (loss) before
extraordinary item and
cumulative effect of
an accounting change $ .11 $ .02 $ .05 $ .04 $ .02 $ (.04)
Extraordinary item -- -- -- -- .01 --
Cumulative effect of an
accounting change -- -- -- .07 -- --
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Net earnings (loss) $ .11 $ .02 $ .05 $ .11 $ .03 $ (.04)
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Year Ended February 28 or 29, As of
Balance Sheet Data: ----------------------------------------------------------------- June 30,
1997 1996 1995 1994 1993 1992
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Working capital $ 11,080 $ 8,118 $ 5,818 $ 3,338 $ 1,945 $ 1,524
Total assets 30,558 22,010 17,131 13,024 9,974 4,755
Long-term obligations 11,160 6,703 3,728 1,752 1,094 342
Shareholders' equity 7,006 5,666 5,482 4,924 3,461 2,680
</TABLE>
* Transition period from July 1, 1992 to February 28, 1993
** On a fully diluted basis, earnings per share for the year ended
February 28, 1997 was $.10 per share. For all other periods
presented, fully diluted earnings per share did not differ materially
from primary earnings per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Operating income increased 117%, from $764,714 in fiscal 1996 to
$1,658,674 in fiscal 1997, as a result of higher sales and gross profit margin,
despite additional costs relating to the startup of new branch operations.
Operating earnings at ACRS and HCS were particularly strong compared to fiscal
1996. Operating losses and non-recurring costs associated with the opening of
five branches in fiscal 1997 amounted to more than $550,000. Net income also
increased significantly, from $183,766 in fiscal 1996 to $1,144,788 in fiscal
year 1997, with higher interest costs offset by a reduction in the deferred tax
asset valuation allowance.
Sales increased 39%, from $56.5 million to $78.4 million, in fiscal
1997 compared to fiscal 1996. Same store sales at the 18 branches in operation
in the first quarter of fiscal 1996 increased 16% in both fiscal 1997 and 1996,
with the balance of the increase in fiscal 1997 attributable to sales from FCS,
ETI, three branches of TSI purchased or opened in late 1995 and a second branch
of VSI in Memphis. All but three of the 18 branches recorded an increase in
sales from fiscal 1996, and new branches subtracted sales from two of the
three. Sales of equipment manufactured by Goodman Manufacturing Company, and
sold under the GMC and Janitrol brand names, continued to escalate, increasing
to $24 million in fiscal 1997 from $16.5 million in fiscal 1996. Sales at LFI,
which was acquired in January 1997, represented only 1% of the increase in
sales from fiscal 1996 to fiscal 1997.
The Company's gross margin percentage increased to 19.2% in fiscal
1997 from 19.0% in fiscal 1996, although the margin percentage on GMC/Janitrol
sales declined from 14.2% to 13.9%. The gross margin percentage at each of the
Company's newest operations, ETI and FCS, is higher than the overall average,
because of minimal HVACR equipment sales during fiscal 1997 at these companies.
In the HVACR industry, the profit margin on sales of equipment, such as
condensing units, furnaces and heat pumps, is generally less than on sales of
parts and supplies. In addition, ETI provides engineering services in
connection with sales of its control systems, and is able to command a higher
gross margin on its sales with such value-added services. LFI, which
manufactures most of the products that it sells, also obtains a much higher
gross margin on its sales than the Company's wholesale operations, but because
only two months of LFI's operations were included in the Company's fiscal 1997
results, this factor had little impact on the Company's overall margin in fiscal
1997.
Selling, general and administrative costs ("SG&A") as a percentage of
sales declined to 17.7% in fiscal 1997, compared to 17.8% in fiscal 1996. With
payroll costs representing
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57% and 56% of SG&A expenses (10.2% and 10.1% of sales) in fiscal 1997 and
1996, respectively, the Company focuses on increasing the sales volume of each
of its branch operations as a means to generate higher gross profit without a
proportional increase in number of employees or amount of non-payroll expenses.
However, SG&A expenses as a percentage of sales are generally high during the
first year of a new branch operation as sales volume gradually increases. The
costs associated with opening new branches caused SG&A expenses to remain at a
higher percentage of sales in fiscal 1997 than will be expected as such
branches become more seasoned. Additionally, the Company recorded a
non-recurring charge of $125,000 during fiscal 1997 for performance-based
compensation pursuant to the employment contract of its chief executive
officer.
Beginning in fiscal 1997, the Company earned commission revenue from a
supplier by providing warehousing and shipping services to another distributor
of the supplier. This arrangement has been modified by the supplier such that
revenues in calendar 1997 will be earned at a rate approximately equal to 70%
of the rate in calendar 1996.
Net energy services income increased 13% from fiscal 1996 to fiscal
1997 as the Company continued to provide services on a month-to-month basis to
its remaining customer, following the expiration of its energy services
contract in 1996. Management does not expect to negotiate another contract
with the customer, but the customer is partially dependent on the Company for
the proper operation of its HVACR systems. Management cannot estimate how long
such an informal arrangement may continue.
Interest expense increased 44% in fiscal 1997 compared to 1996 as a
result of the Company's increased borrowings. In 1997, interest expense was
1.2% of sales, compared to 1.1% of sales in 1996. See Liquidity and Capital
Resources, below. Other non-operating income increased 94% from fiscal 1996 to
fiscal 1997 as the Company strengthened its policy to collect finance charges
from customers with past due balances.
Current income tax expense consists principally of state income taxes.
As a result of the Company's substantial tax loss carryforwards, the Company
has minimal liability for Federal income taxes. See Liquidity and Capital
Resources, below. In the fourth quarter of fiscal 1997, the Company determined
that a further reduction in the deferred tax asset valuation allowance was
appropriate given expectations of higher future taxable income and, as a
result, recorded an additional tax benefit of $360,000.
In April 1997, the Company acquired the assets and liabilities of ACH
Supply, Inc. ("ACH"), a wholesale distributor of HVACR products with two branch
operations in the Los Angeles area. ACH had sales of $2.8 million in its
fiscal year ended June 30, 1996. Management of the Company believes that there
are substantial opportunities to increase the business of ACH by opening new
branch operations or acquiring other small distributors over the next several
years.
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In May 1997, the Company entered into a letter of intent to acquire
Contractors Heating & Supply, Inc. ("CHS"), a Denver-based HVACR distributor.
CHS, which had calendar 1996 sales of $20 million, has three branches in
Colorado and one in New Mexico. CHS's operations include a sheet metal shop
which fabricates products sold through its distribution branches. See
Liquidity and Capital Resources, below.
Fiscal 1996 Compared to Fiscal 1995
Operating income declined 19%, from $945,607 in fiscal 1995 to
$764,714 in fiscal 1996, because of lower gross margins on sales, startup costs
associated with the opening of new branch operations, and increased inventory
shrinkage. Additionally, higher interest costs associated with borrowings
required to support the sales growth of the Company resulted in a reduction of
net income to $183,766 in fiscal 1996, compared to $558,206 in fiscal 1995, a
decline of 67%.
Sales increased 37%, from $41.3 million in fiscal 1995 to $56.5
million in fiscal 1996, with each subsidiary reporting a significant increase
in sales. Same store sales at ACRS increased 16% in fiscal 1996, compared to
13% in fiscal 1995. Sales at TSI increased 72% in fiscal 1996; aggregate sales
at the two branches that existed at the beginning of fiscal 1996 increased 4%
despite the opening during the year of two additional, larger branches within
the sale metropolitan Atlanta trade area. TSI also acquired two branch
operations in central and south Georgia which expanded the territory in which
TSI has the distribution right to sell the GMC brand of HVACR equipment to
almost the entire state of Georgia.
Sales at HCS rose 45% in fiscal 1996, principally because of a
substantial increase in the volume of Janitrol sales to the residential market
sector. Janitrol equipment sales represented 36% of HCS's sales in fiscal
1996, compared to 9% in fiscal 1995, the first year that HCS distributed
Janitrol equipment. Sales at VSI increased 80% in fiscal 1996 from fiscal
1995, when VSI first opened. During fiscal 1996, VSI gradually enlarged its
sales of products other than GMC equipment. Sales of GMC equipment comprised
85% of VSI's sales in fiscal 1996, compared to 90% in fiscal 1995. The Company
acquired ETI in January 1995, and its sales for the two-month period ended
February 29, 1996 represented only 2% of the increase in the Company's from
1995 to 1996.
The Company's gross margin percentage declined to 19.0% in fiscal 1996
from 20.7% in fiscal 1995, as a result of the continually increasing percentage
of consolidated sales that are generated by TSI and VSI. Because TSI and VSI
sell substantially more HVACR equipment than other products, and because their
primary equipment supplier provides incentives to its distributors to induce a
greater volume of sales at lower gross margins, their sales tend to depress the
Company's consolidated gross margin percentage. In addition, the increase in
Janitrol equipment sales at HCS, as described above, reduced HCS's gross margin
percentage by almost 4% in fiscal 1996 compared to 1995. The gross margin
percentage at ACRS also declined 1.6% in 1996, as the company gained market
share in
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part by negotiating bulk sales to customers at low margins of products that
could be shipped directly to the customer from the manufacturer.
SG&A expenses as a percentage of sales declined to 17.8% in fiscal
1996, compared to 18.9% in fiscal 1995, following the expected trend as average
sales per branch operation increase. Net operating income from energy services
decreased 36% from fiscal 1995 to fiscal 1996. In 1995, the Company recognized
non-recurring revenue following a review of an energy services contract which
revealed that the Company had not received certain funds due under the terms of
the contract. Excluding revenues from this contract, net energy service income
declined 15% from 1995 to 1996. All of the Company's remaining energy services
contracts expired in fiscal 1996.
Interest expense increased 43% in fiscal 1996 compared to 1995 as a
result of the Company's increased borrowings. Income tax expense consisted
primarily of state income taxes in fiscal 1996 and 1995.
Liquidity and Capital Resources
Working capital increased from $8,118,061 at February 29, 1996 to
$11,080,075 at February 28, 1997 as a result of the Company's earnings and
borrowings under the Company's revolving credit facility. Current assets
increased 32% from 1996 to 1997, principally in accounts receivable and
inventory. Accounts receivable represented 54 days of gross sales at the end
of fiscal 1997, compared to 49 days of sales in receivables at the end of
fiscal 1996 because of slow sales in February 1997 and extended payment terms
that were provided to certain customers in fiscal 1997. Of the $3.7 million
increase in inventory, $700,000 was attributable to an increase in pre-season
shipments of air conditioning equipment received by ACRS from its primary
supplier, and $1.9 million was located at operations started up or acquired in
fiscal 1997. The remainder of the increase in inventory was acquired in
anticipation of greater sales than the preceding year.
The Company has credit facilities with a commercial bank ("Bank")
which include an $8 million revolving line of credit and a $500,000 term loan
facility for the purchase of capital equipment. At February 28, 1997, the
Company had fully utilized its line of credit with borrowings of $7.4 million
and $.6 million in standby letters of credit and had outstanding borrowings
under the term loan facility of $355,128. Borrowings under the revolving
credit facility are secured by accounts receivable and inventory, and the
permitted amount of outstanding borrowings at any time is limited to
percentages of certain accounts receivable and inventory. Borrowings under the
credit line bear interest at the Bank's prime rate plus 1/2%. Restrictive
covenants of the loan agreement prohibit the Company from paying dividends,
prepaying its debt to The Catalyst Fund, Ltd. (see Note 4 of Notes to
Consolidated Financial Statements) or incurring other debt without the Bank's
consent, and also require the Company to maintain certain financial ratios.
Additional borrowings under the revolving line of credit during fiscal 1997
were used for working capital necessary to
- 16 -
<PAGE> 17
open new branch locations and to support higher levels of sales at all of the
Company's operations. See Results of Operations - Fiscal 1997 Compared to
Fiscal 1996, above.
The revolving line of credit matures on February 28, 1998. As a
result of the Company's acquisitions during 1997, the Company was not in
compliance with certain financial covenants under the revolving line of credit
at February 28, 1997, and the Company has obtained waivers of such violations
from the Bank through August 31, 1997. On May 12, 1997, as amended on June 10,
1997, the Company obtained a firm commitment from the Bank to refinance the
existing $8 million revolving line of credit with a new $18 million revolving
credit facility, including a $1 million sub-facility for letters of credit.
The new revolving credit facility provides for borrowings, at the Company's
option, at either the Bank's prime rate plus 1/2% or LIBOR plus 3.00%.
Borrowings under the new revolving credit facility will be limited to 85% of
eligible accounts receivable and 50% of eligible inventory amounts. See Note 4
of Notes to Consolidated Financial Statements.
In connection with its acquisition of LFI, the Company obtained $1.4
million in financing from St. James Capital Partners, L.P. ("St. James"), which
was used to pay the cash portion of the purchase price and various transaction
costs. The note issued to St. James ("St. James Note") bears interest at 10%
per annum and has an initial maturity date of January 24, 1998. In connection
with the financing, the Company also issued St. James a warrant to acquire
280,000 shares of the Company's common stock at $1.625 per share. The Company
may elect to extend the maturity date of the St. James Note for one year past
the initial maturity date, in which case the Company will be required to issue
a warrant for a number of shares equal to 10% of the outstanding indebtedness,
including interest, on the Note. The Company expects to exercise this option.
None of the principal or accrued interest on the St. James Note is payable
prior to maturity. The St. James Note is also convertible into common stock of
the Company at $2.40 per share. The Company also issued a note to an affiliate
of the former owner of LFI for $1,166,662, which bears interest at prime plus
1% and is payable in twelve equal quarterly installments of principal, plus
accrued interest, beginning March 31, 1997. Both the St. James Note and the
note to the affiliate of LFI's former owner are subordinated to the Bank. See
Note 4 of Notes to Consolidated Financial Statements.
The Company made capital expenditures of $1.4 million in fiscal 1997,
of which $410,000 was for land in Las Vegas on which the Company intends to
construct an office/warehouse to replace its existing leased premises, and
$420,000 was for leasehold improvements, equipment and vehicles for new
branches. The remainder of capital expenditures was principally for the
addition or replacement of vehicles under capital leases.
The purchase price of the assets and liabilities of CHS is estimated
at $6 million of which $4.8 million will be financed by the Bank under the new
revolving credit facility described above, and $1.2 million will be financed by
the seller. The Company expects to conclude the acquisition of CHS in the
second quarter of fiscal 1998. In addition, the
- 17 -
<PAGE> 18
increased facility should provide the funds necessary to finance the expected
growth of existing operations in fiscal 1998.
Management is engaged in discussions to sell the land that it owns in
Las Vegas and in Temple, Texas to buyers who would construct buildings meeting
the Company's specifications and lease the completed facilities to the Company
under long-term leases. The purchase of the Las Vegas land was partially
financed by the seller, whose note matures in September 1997.
The Company has approximately $33 million in tax loss carryforwards
and $1.1 million in tax credit carryforwards. Such operating loss and tax
credit carryforwards will substantially limit the Company's federal income tax
liabilities in the near future. Certain provisions of the Internal Revenue
Code ("Code") regulate the amount of additional stock that the Company could
issue without resulting in a change in ownership control, as defined in the
Code. Should such a change in control be deemed to occur, the Company's
ability to utilize its operating loss and tax credit carryforwards would be
severely restricted. See Note 6 of Notes to Consolidated Financial Statements.
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. The acquisition of CHS, which is based in Denver, may offset
some of the Company's existing seasonality.
Inflation
The Company does not believe that inflation has had a material effect
on its results of operations in recent years. Generally, manufacturer price
increases attributable to inflation uniformly affect both the Company and its
competitors, and such increases are passed through to customers as an increase
in sales prices.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which specifies the computation, presentation
and disclosure requirements for earnings per share. SFAS No. 128 is effective
for financial statements for periods ending after December 15, 1997, and
earlier adoption is not permitted.
- 18 -
<PAGE> 19
SFAS No. 129, "Disclosure of Information about Capital Structure," was
issued in February 1997. This statement is effective for financial statements
for periods ending after December 15, 1997.
The Company has not yet determined the impact on the consolidated
financial statements from the initial adoption of these standards.
- 19 -
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF ACR GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 21
Consolidated balance sheets as of February 28, 1997 and
February 29, 1996 22
Consolidated statements of operations for the fiscal years
ended February 28, 1997, February 29, 1996 and February 28, 1995 24
Consolidated statements of shareholders' equity for the
fiscal years ended February 28, 1997, February 29, 1996
and February 28, 1995 25
Consolidated statements of cash flows for the fiscal years
ended February 28, 1997, February 29, 1996 and February 28, 1995 26
Notes to Consolidated Financial Statements 28
</TABLE>
- 20 -
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ACR Group, Inc.
We have audited the accompanying consolidated balance sheets of ACR Group, Inc.
and subsidiaries as of February 28, 1997 and February 29, 1996 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended February 28, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries at February 28, 1997 and February 29, 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
June 10, 1997
- 21 -
<PAGE> 22
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Current assets:
Cash $ 412,699 $ 348,162
Accounts receivable, net of allowance
for doubtful accounts of $584,024 in
1997 and $459,501 in 1996 8,914,933 7,188,839
Inventory 13,667,019 9,934,637
Prepaid expenses and other 130,142 151,027
Deferred income taxes 347,000 136,000
--------------- ---------------
Total current assets 23,471,793 17,758,665
--------------- ---------------
Property and equipment, net of
accumulated depreciation 3,435,406 2,110,997
Deferred income taxes 693,000 544,000
Goodwill, net of accumulated amortization
of $176,361 in 1997 and $121,770 in 1996 2,657,500 1,470,665
Other assets 299,911 125,959
--------------- ---------------
Total assets $ 30,557,610 $ 22,010,286
=============== ===============
</TABLE>
- 22 -
<PAGE> 23
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 1,255,631 $ 579,485
Current maturities of capital lease
obligations 201,969 135,325
Accounts payable 9,925,146 8,377,600
Accrued expenses and other liabilities 1,008,972 548,194
----------- -----------
Total current liabilities 12,391,718 9,640,604
----------- -----------
Long-term debt 10,735,064 6,397,722
Long-term capital lease obligations 424,828 305,748
----------- -----------
Total liabilities 23,551,610 16,344,074
----------- -----------
Contingencies and commitments
Shareholders' equity:
Preferred stock, $.01 par, authorized
2,000,000 shares, none outstanding -- --
Common stock - $.01 par, authorized
25,000,000 shares, issued and
outstanding 10,371,555 shares in 1997
and 10,246,555 shares in 1996 103,716 102,466
Additional paid-in capital 41,620,770 41,427,020
Accumulated deficit (34,718,486) (35,863,274)
----------- -----------
Total shareholders' equity 7,006,000 5,666,212
----------- -----------
Total liabilities and
shareholders' equity $30,557,610 $22,010,286
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 23 -
<PAGE> 24
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND
FEBRUARY 28, 1995
<TABLE>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Sales $ 78,371,020 $ 56,500,253 $ 41,281,119
Cost of sales 63,285,694 45,779,447 32,717,879
-------------- -------------- --------------
Gross profit 15,085,326 10,720,806 8,563,240
Selling, general and
administrative expenses (13,859,797) (10,082,119) (7,814,189)
Commission income 290,919 -- --
Energy services income, net 142,226 126,027 196,556
-------------- -------------- --------------
Operating income 1,658,674 764,714 945,607
Interest expense (925,409) (644,767) (451,305)
Other non-operating income 153,238 78,863 67,404
-------------- -------------- --------------
Income before income taxes 886,503 198,810 561,706
Provision (benefit) for income taxes:
Current 101,715 15,044 3,500
Deferred (360,000) -- --
-------------- -------------- --------------
Net income $ 1,144,788 $ 183,766 $ 558,206
============== ============== ==============
Earnings per common share:
Primary $ .11 $ .02 $ .05
Fully diluted .10 .02 .05
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 24 -
<PAGE> 25
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Additional
No. of Shares Paid-In Accumulated
Issued Par Value Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1994 10,246,555 $ 102,466 $ 41,427,020 $(36,605,246) $ 4,924,240
Net income -- -- -- 558,206 558,206
------------ ------------ ------------ ------------ ------------
Balance, February 28, 1995 10,246,555 102,466 41,427,020 (36,047,040) 5,482,446
Net income -- -- -- 183,766 183,766
------------ ------------ ------------ ------------ ------------
Balance, February 29, 1996 10,246,555 102,466 41,427,020 (35,863,274) 5,666,212
Shares issued as compensation 125,000 1,250 123,750 -- 125,000
Issuance of warrant -- -- 70,000 -- 70,000
Net income -- -- -- 1,144,788 1,144,788
------------ ------------ ------------ ------------ ------------
Balance, February 28, 1997 10,371,555 $ 103,716 $ 41,620,770 $(34,718,486) $ 7,006,000
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-25-
<PAGE> 26
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29,
1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,144,788 $ 183,766 $ 558,206
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 705,037 542,965 444,803
Deferred income taxes (360,000) -- --
Stock issued as compensation 125,000 -- --
Provision for bad debts 252,572 326,349 218,052
(Gain) loss on sale of assets (798) 8,395 (20,859)
Changes in operating assets and
liabilities:
Accounts receivable (1,772,188) (2,192,222) (742,063)
Inventory (3,673,165) (1,090,047) (3,367,311)
Prepaid expense and other
assets (172,147) 297,499 7,775
Accounts payable 1,521,117 1,009,879 1,317,439
Accrued expenses and other
liabilities 425,050 22,058 155,054
------------- ------------- -------------
Net cash used in operating activities (1,804,734) (891,358) (1,428,904)
------------- ------------- -------------
Investing activities:
Acquisition of property and
equipment (754,686) (956,744) (445,843)
Acquisition of businesses, net of
cash acquired (895,651) (94,813) --
Proceeds from disposition of assets 42,951 27,844 30,160
------------- ------------- -------------
Net cash used in investing activities (1,607,386) (1,023,713) (415,683)
------------- ------------- -------------
Financing activities:
Proceeds from long-term debt 4,293,457 3,045,019 2,636,822
Payments on long-term debt (816,800) (944,531) (679,769)
------------- ------------- -------------
Net cash provided by financing
activities 3,476,657 2,100,488 1,957,053
------------- ------------- -------------
Net increase in cash 64,537 185,417 112,466
Cash at beginning of year 348,162 162,745 50,279
------------- ------------- -------------
Cash at end of year $ 412,699 $ 348,162 $ 162,745
============= ============= =============
</TABLE>
(continued)
- 26 -
<PAGE> 27
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29,
1996 AND FEBRUARY 28, 1995
(continued)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired $ 1,305,466 $ 461,113 $ --
Fair value of liabilities assumed (66,932) (553,814) --
Goodwill 1,241,426 127,701 --
Notes payable to sellers 1,166,662 291,789 --
Purchase of property and equipment
(net of cash paid):
For notes payable 250,000 -- --
Under capital leases 371,118 289,921 119,750
Supplemental cash flow information:
Interest paid 917,373 635,585 462,237
Federal income taxes paid 22,000 6,062 5,000
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 27 -
<PAGE> 28
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,
central and south Texas; and Las Vegas, Nevada.
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 shipped or
delivered to the customer.
Beginning in fiscal 1997, the Company earned commission income from a
supplier by providing warehousing and shipping services to another distributor
of the supplier.
Energy Services
Revenues from energy service contracts, which expired in 1996 and
continue on a month-to-month basis, are recognized when the related energy cost
savings are billed to the user. These revenues are insignificant to the sales
of the Company and are presented net of costs to provide such services.
Inventories
Inventories are valued at the lower of cost or market using the
average cost method. Substantially all inventories represent finished goods
held for sale. The Company has an arrangement with an HVACR equipment
manufacturer and
- 28 -
<PAGE> 29
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1 - Description of Business and Summary of Significant Accounting Policies
(continued)
Inventories (continued)
a field warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of the Company's operations in Georgia, Las
Vegas, and Memphis, with payment due only when products are sold. Such
inventory is accounted for as consigned merchandise and is not recorded on the
Company's balance sheet. The cost of such inventory held in the bonded
warehouses was $15,998,345 at February 28, 1997 and $10,881,771 at February 29,
1996.
The terms of the consignment agreement with the supplier further
provide that merchandise not sold within a specified period of time must be
purchased by the Company. The Company believes that substantially all
consigned merchandise will be sold in the ordinary course of business before
any purchase obligation is incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives. Energy management equipment is fully depreciated.
<TABLE>
<S> <C>
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
</TABLE>
Goodwill
Goodwill represents the excess cost of companies acquired over the
fair value of their tangible assets. Goodwill is being amortized on a
straight-line basis over 10-40 years. The carrying value of goodwill is
reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that goodwill will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill will be
reduced by the estimated shortfall of the undiscounted cash flows.
- 29 -
<PAGE> 30
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1 - Description of Business and Summary of Significant Accounting Policies
(continued)
Income Taxes
The Company and its subsidiaries file a consolidated federal income
tax return. The Company uses the liability method in accounting for income
taxes. Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Earnings Per Share
Earnings per share are based upon earnings applicable to common shares
and the weighted average number of shares of common stock and dilutive common
stock equivalents (stock options, warrants and other convertible securities)
outstanding. The primary weighted average number of common and equivalent
shares outstanding was 10,884,495, 10,246,555, and 10,246,555 for 1997, 1996
and 1995, respectively. The fully diluted weighted average number of common
and equivalent shares outstanding was 10,913,309 for 1997, 10,513,485 for 1996,
and 10,613,038 for 1995.
Stock Options
In fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based
Compensation," which permits the Company to recognize compensation cost related
to stock options using either the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees" or the fair value method under SFAS No. 123. The Company has
elected to continue to follow APB No. 25 in accounting for stock options.
Supplier/Sources of Supply
The Company currently purchases a majority of its HVACR equipment and
repair parts from two primary suppliers. The Company has not encountered any
significant difficulty to date in obtaining equipment and repair parts to
support its operations at current or expected near-term future levels.
However, any disruption in these supply sources could have an adverse effect
upon the Company's operations.
- 30 -
<PAGE> 31
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1 - Description of Business and Summary of Significant Accounting Policies
(continued)
Long-Lived Assets
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Impairment losses are recognized when indicators of impairment are present and
the estimated undiscounted cash flows are not sufficient to recover the
carrying amount of the assets. The impairment loss is measured by comparing
the fair value of the asset to its carrying value. The effect of adopting SFAS
No. 121 was not material to the consolidated financial statements.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which specifies the computation, presentation
and disclosure requirements for earnings per share. SFAS No. 128 is effective
for financial statements for periods ending after December 15, 1997, and
earlier adoption is not permitted.
SFAS No. 129, "Disclosure of Information about Capital Structure," was
issued in February 1997. This statement is effective for financial statements
for periods ending after December 15, 1997.
The Company has not yet determined the impact on the consolidated
financial statements from the initial adoption of these standards.
2 - Acquisitions
In January 1997, the Company entered into a Purchase Agreement
("Agreement") pursuant to which it acquired all of the issued and outstanding
capital stock of Lifetime Filter, Inc. ("LFI"), a Texas corporation, and
contemporaneously therewith, LFI acquired all of the assets, and assumed all of
the liabilities, of the O'Leary Family Partnership, Ltd. ("OFP"), a Texas
limited partnership. Prior to such transactions, Mr. Richard O'Leary
("O'Leary") was the sole shareholder of both LFI and RGO, Ltd., the general
partner of OFP. LFI is a manufacturer and distributor of electrostatic air
filters and sells its products directly to HVACR contractors.
As consideration for such acquisitions, the Company paid $1,280,662 to
O'Leary and OFP, and LFI issued a promissory note to OFP for $1,166,662. All
of the cash paid by the Company came from a portion of the proceeds of a loan
to the Company from St. James Capital Partners, L.P. (see Note 4). The
Agreement provides that the purchase price may subsequently be reduced if LFI
fails to sell
- 31 -
<PAGE> 32
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2 - Acquisitions (continued)
a specified dollar volume of filters during 1997. The excess of the purchase
price over the estimated fair value of the net assets acquired amounted to
$1,241,426, which has been recorded as goodwill and is being amortized over 40
years using the straight-line method.
Unaudited pro forma results of the Company's operations for the years
ended February 28, 1997 and February 29, 1996, as if the acquisitions of LFI
and OFP had occurred as of the beginning of each of such fiscal years, are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales $80,393,205 $57,880,455
Net income 1,399,535 84,145
Earnings per common share:
Primary 0.13 0.01
Fully diluted 0.13 0.01
</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 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, 1996 or March 1, 1995, as applicable, or of future results of
operations of the consolidated entities.
In January 1996, the Company acquired all of the outstanding capital
stock of Ener-Tech Industries, Inc. ("ETI"), a Tennessee corporation, for
$72,947 cash and $291,789 in notes payable to the sellers (see Note 4). ETI is
an HVACR distributor specializing in commercial and industrial controls. In
October 1995, the Company acquired for $75,000 cash all of the outstanding
capital stock of Sweet Georgia Air Supply, Inc. ("SGAS"), a Georgia
corporation. SGAS was an HVACR distributor in south Georgia. Immediately
following the acquisition, SGAS was merged into Total Supply, Inc., the
Company's subsidiary doing business in Georgia. The Company recorded goodwill
of $127,701 in connection with the acquisition of SGAS. Pro forma results of
operations relating to these fiscal 1996 acquisitions are not presented because
the effects of such acquisitions were not significant.
Each of the acquisitions was accounted for using the purchase method
of accounting, and the consolidated financial statements include the operating
results of each business from the date of acquisition.
- 32 -
<PAGE> 33
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3 - Property and Equipment
Property and equipment consisted of the following at the end of
February:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Land $ 693,246 $ 68,593
Building and leasehold
improvements 1,274,429 820,820
Furniture and fixtures 119,077 107,925
Vehicles 1,242,964 900,926
Other equipment 1,747,913 1,294,909
Energy management equipment 260,887 388,612
------------- -------------
5,338,516 3,581,785
Less accumulated depreciation (1,903,110) (1,470,788)
------------- -------------
Net property and equipment $ 3,435,406 $ 2,110,997
============= =============
</TABLE>
Capitalized lease assets of $982,377 and $654,359, together with
accumulated amortization of $325,706 and $198,847 are included in property and
equipment as of February 28, 1997 and February 29, 1996, respectively.
Amortization expense is included with depreciation expense.
4 - Debt
Debt is summarized as follows at the end of February:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revolving line of credit $7,400,000 $4,900,000
Note payable - St. James Capital
Partners, L.P. 1,330,000 -
Real estate loans 629,200 408,000
Equipment term loan 355,128 144,266
Notes payable - Catalyst Fund 527,250 718,038
Notes payable to sellers of
companies acquired (Note 2) 1,409,994 291,789
Obligation to trade creditor 114,500 325,000
Other 224,623 190,114
----------- ----------
11,990,695 6,977,207
Less current maturities (1,255,631) (579,485)
----------- ----------
Long-term debt, less current
maturities $10,735,064 $6,397,722
=========== ==========
</TABLE>
- 33 -
<PAGE> 34
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - Debt (continued)
The Company has a revolving line of credit arrangement with a
commercial bank ("Bank") pursuant to which the Company may borrow up to $8
million, including amounts outstanding under standby letters of credit.
Borrowings are secured by accounts receivable and inventory, and the permitted
amount of outstanding borrowings at any time is limited to specified
percentages of certain accounts receivable and inventory. Borrowings under the
line of credit bear interest at the prime rate plus 1/2% (9% at February 28,
1997), payable monthly. Restrictive covenants of the loan agreement prohibit
the Company from paying dividends, prepaying its indebtedness to The Catalyst
Fund, Ltd. ("Catalyst") or incurring other debt without the Bank's consent, and
also require the Company to maintain certain financial ratios. As of February
28, 1997, the Company had fully utilized its line of credit with $7.4 million
in outstanding borrowings and letters of credit aggregating $600,000 issued to
secure its trade credit line from a supplier.
The revolving line of credit matures on February 28, 1998. As a
result of the Company's acquisitions during 1997, the Company was in violation
of certain financial covenants under the revolving line of credit at February
28, 1997. The Company has obtained waivers of these debt covenant violations
from the Bank through August 31, 1997. On May 12, 1997, as amended on June 10,
1997, the Company obtained a firm commitment from the Bank to refinance the
existing $8 million revolving line of credit with a new $18 million revolving
credit facility, including a $1 million sub-facility for letters of credit.
The new revolving credit facility provides for borrowings, at the Company's
option, at either the Bank's prime rate plus 1/2% or LIBOR plus 3.00%.
Borrowings under the new revolving credit facility will be limited to 85% of
eligible accounts receivable and 50% of eligible inventory amounts. The
Company expects to close on the new revolving credit facility by June 30, 1997.
Accordingly, the Company has classified the $7.4 million outstanding under the
revolving line of credit at February 28, 1997 as long-term debt in the
accompanying consolidated balance sheet because the Company intends that at
least that amount would remain outstanding under the new revolving credit
agreement for an uninterrupted period extending beyond one year from February
28, 1997.
In connection with its acquisition of LFI in January 1997 (see Note
2), the Company obtained $1.4 million in financing from St. James Capital
Partners, L.P. ("St. James"). The note issued to St. James (the "St. James
Note") bears interest at 10% per annum and has an initial maturity date of
January 24, 1998, which can be extended for one year at the Company's sole
discretion. The Company may elect to extend the maturity date of the St. James
Note for one year past the initial maturity date, in which case the Company
will be required to issue a warrant for a number of shares of the Company's
common stock equal to 10% of the outstanding indebtedness, including
interest, on the St. James Note with
- 34 -
<PAGE> 35
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - Debt (continued)
an exercise price of $1.625 per share of common stock. The St. James Note is
classified as long-term debt at February 28, 1997 in the accompanying
consolidated balance sheet, because the Company expects to exercise its option
to extend the maturity date to January 24, 1999. The St. James Note is secured
by certain assets of LFI and by the stock and operating assets of certain of
the Company's other subsidiaries. St. James has subordinated its security
interests to the Bank and, with respect to certain assets, to Catalyst. None
of the principal or accrued interest is payable prior to maturity. The unpaid
balance of the note, including interest, is convertible into common stock of
the Company at $2.40 per share upon demand by St. James at any time during the
term of the loan. The Company may require St. James to convert the
indebtedness into the Company's common stock at such time as the average price
of the Company's common stock equals or exceeds $3.25 per share for a period of
twenty consecutive business days and the daily average volume of stock traded
during such period equals a specified minimum. In connection with the
financing, the Company also issued St. James a warrant to acquire 280,000
shares of the Company's common stock at an exercise price of $1.625 per share
(see Note 7). The proceeds of the St. James Note were allocated between the
debt and the warrant, resulting in a debt discount of approximately $70,000,
which is being amortized to interest expense over the term of the loan.
The OFP Note bears interest at the prime rate plus 1% per annum. The
Note is to be repaid in twelve equal quarterly installments of principal, plus
accrued interest. The unpaid balance of the OFP Note, together with all
accrued and unpaid interest, is due and payable on December 31, 1999. The Note
is secured by a first lien on certain production machinery of LFI and the land
and building on which LFI's plant is situated, and by a junior lien on the
accounts receivable and inventory of LFI. The OFP Note is subordinated to the
Company's indebtedness to the Bank.
The Company also borrowed funds from the Bank in 1995 to construct a
warehouse and office building that replaced an existing branch facility in the
Houston area. The note, which has a balance of $379,200 as of February 28,
1997, is being repaid in equal monthly principal installments of $2,400, plus
interest at the prime rate plus 1%, with the unpaid principal balance due at
maturity on April 30, 2000. The loan is secured by a deed of trust on both the
land and the building.
The Company also has a term loan facility from the Bank under which
the Company may borrow up to $500,000 for capital expenditures. Borrowings
under the facility bear interest at the prime rate plus 1/2%, and principal is
to be repaid monthly over an amortization period of 48 months. During fiscal
1997, the Company borrowed $130,000 under this facility to purchase land in
Las Vegas for
- 35 -
<PAGE> 36
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - Debt (continued)
the future construction of a new office/warehouse. The Company also obtained
seller financing for $250,000, which is payable in full in September 1997.
In 1993, the Company obtained a $1 million loan from Catalyst in
connection with the acquisition of ACR Supply, Inc. The loan bears interest at
12 1/2% per annum and is secured by the stock and operating assets of certain
of the Company's subsidiaries and an assignment of proceeds from a life
insurance policy on the Company's President. The loan is being repaid in 60
equal monthly installments of $22,498, including interest, with the final
payment due in May 1999. In addition, Catalyst received a warrant to purchase
one million shares of the Company's common stock at a price of $.59 per share,
exercisable at any time before May 1999 (see Note 7). Catalyst has
subordinated its security interests to the Bank. Covenants of the loan
agreement prohibit dividends and restrict additional borrowings without
Catalyst's consent, and also require the Company to maintain specified
financial ratios. The Company has obtained amendments of certain covenants in
the Company's loan agreement with Catalyst which cure any non-compliance with
such covenants as of February 28, 1997, and the Company expects to be in
compliance with all covenants during fiscal 1998.
The notes issued as part of the purchase price of ETI ("ETI Notes")
bear interest at 9% per annum, and are payable in equal quarterly installments,
including interest, to December 2000. The ETI Notes are unsecured and are
subordinated to the Company's borrowings from the Bank.
A supplier permitted a subsidiary of the Company to forego payment on
usual terms for certain merchandise purchased and, in 1993, the Company and the
supplier agreed on a repayment schedule such that $650,000 would be repaid in
four annual installments. The final payment is due in May 1997. The supplier
has a subordinated security interest in the assets of the subsidiary.
At February 28, 1997, other debt consists principally of debt assumed
by the Company in connection with its acquisitions during fiscal 1996. Such
debt was incurred for both working capital and the purchase of capital assets
and includes notes to both individuals and to commercial banks. Debt
aggregating $66,497 to certain individuals at February 28, 1997 is subordinated
by the lenders to the Company's borrowings from the Bank.
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.
- 36 -
<PAGE> 37
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - Debt (continued)
Future maturities of debt, assuming the refinancing of the line of
credit with the Bank and the exercise of the Company's option to extend the
maturity of the St. James Note, are $1,255,631 in 1998, $2,218,499 in 1999,
$8,065,011 in 2000 and $451,554 in 2001.
5 - Lease Commitments
The Company leases warehouse and office equipment and vehicles under
capital leases. Future minimum lease payments under capital leases are as
follows:
<TABLE>
<CAPTION>
Year ending February 28 or 29 Capital lease payments
----------------------------- ----------------------
<S> <C>
1998 $257,955
1999 229,266
2000 158,433
2001 94,303
2002 2,764
--------
Total minimum lease payments $742,721
Less amounts representing interest (115,924)
--------
Present value of future minimum
lease payments 626,797
Less current maturities of
capital lease obligations (201,969)
--------
Long-term obligations under
capital leases $424,828
========
</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 2007. 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 $1,399,714 in 1998, $946,435 in 1999, $825,199 in 2000, $637,931 in
2001, $358,398 in 2002 and $521,434 after 2002.
Rental expenses were $1,292,999, $994,251 and $747,353 in 1997, 1996
and 1995 respectively.
- 37 -
<PAGE> 38
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 classified as
current to the extent that a tax benefit is expected to be realized in the next
fiscal period.
The income tax benefit for the fiscal year ended February 28, 1997
consists primarily of a change in the valuation allowance offset by a provision
for current state income taxes and federal alternative minimum taxes. Income
tax expense for the fiscal years ended February 29, 1996 and February 28, 1995
consists principally of current state income taxes and federal alternative
minimum taxes. The difference between the income tax provision computed at the
statutory federal income tax rate and the financial statement provision for
taxes is summarized below:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Tax at statutory rate $ 301,411 $ 67,595 $190,980
Increase (reduction) in tax
expense resulting from:
Change in valuation allowance (668,578) (93,539) (222,501)
Nondeductible expenses 48,725 39,640 31,521
Other 60,157 1,348 3,500
--------- -------- --------
Actual income tax provision
(benefit) $(258,285) $ 15,044 $ 3,500
========= ======== ========
</TABLE>
As of February 28, 1997 and February 29, 1996, the Company has net
operating loss carryforwards of approximately $32.7 million and $34.3 million,
respectively, which are available to offset future taxable income. If unused,
such carryforwards will expire from 2000 to 2007. In addition, as of February
28, 1997 and February 29, 1996, the Company has investment and research and
development tax credit carryforwards of approximately $1.1 million expiring on
various dates through 2000. For financial reporting purposes, the Company has
recognized a valuation allowance of $11.7 million and $12.4 million as of
February 28, 1997 and February 29, 1996, respectively, to offset the deferred
tax
- 38 -
<PAGE> 39
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6 - Income Taxes (continued)
assets related primarily to the loss carryforward and the credit carryforwards.
The decrease in the valuation allowance from February 29, 1996 to February 28,
1997 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
28, 1997.
7 - Stock Option Agreements and Equity Transactions
Pursuant to an employment contract, the President of the Company was
granted 125,000 shares of the Company's common stock, valued at $125,000,
during fiscal 1997. The contract also provides that he is to receive options
for up to 425,000 shares of the Company's stock based upon attainment in the
future of certain levels of consolidated net income as defined in the contract.
The exercise price of all options issued thereunder is the market price of the
Company's stock at the time the options are granted. Of such options, 50,000
(none in fiscal 1997 and 25,000 in fiscal 1996), which expire 25,000 in each of
May 1999 and June 2000, have been granted at an average exercise price of $.77
per share. Options for 75,000 shares will be granted in fiscal 1998 based upon
the Company's results of operations in fiscal 1997. The President also holds
options to purchase 8,437 shares at $.13 per share that expire in August 1997,
and 325,000 shares at $.49 per share that expire in February 1998. All such
options granted are currently exercisable.
In connection with its financing provided to the Company, St. James
Capital Partners, L.P. ("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, the Catalyst Fund, Ltd. ("Catalyst") received a warrant to
purchase one million shares of the Company's common stock at a price of $.59
per share, exercisable at any time before May 1999. See Note 4. During 1997,
Catalyst sold 250,000 of such warrants to St. James.
In March 1994, the Company entered into an employment contract with
the general manager of a subsidiary and concurrently awarded him options to
purchase 25,000 shares of common stock at $.55 per share that expire in
February 1999. Pursuant to his contract, which expired at the end of February
1997, the Company awarded him options in fiscal 1996 to purchase 15,000 shares
at $.70 per share which expire in April 2000. All such options granted are
currently exercisable.
- 39 -
<PAGE> 40
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7 - Stock Option Agreements and Equity Transactions (continued)
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 the granting of non-qualified stock options and/or incentive stock
options. No options were granted in fiscal 1997 and 500,000 shares of common
stock were available for future grants at February 28, 1997.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and 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 for these options was estimated at the date of grant
using a Black-Scholes option pricing model. Based upon the Company's
calculations, net income and earnings per share, using this fair value method,
would not be materially different from the amounts reported. The weighted
average fair value of options granted during 1996 was $0.33.
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 $111,609, $94,247 and $71,986 for fiscal 1997, 1996 and 1995,
respectively.
9 - Subsequent Events
In April 1997, the Company acquired for approximately $70,000 the
assets and liabilities of ACH Supply, Inc. ("ACH"), a wholesale distributor of
HVACR products with two branches in the Los Angeles area. ACH had sales of
$2.8 million for its fiscal year ended June 30, 1996. In April 1997, the
Company also borrowed an additional $450,000 from Catalyst, the proceeds of
which were used principally to provide working capital for ACH. The payment
terms and the interest rate of the additional borrowings are substantially the
same as for the Company's previously existing loan from Catalyst (see Note 4).
In May 1997, the Company entered into a letter of intent to acquire
the operating assets and related liabilities of Contractors Heating & Supply,
Inc. ("CHS"), a Denver-based HVACR distributor with three branches in Colorado
and one in New Mexico. CHS had sales of approximately $20 million for the year
ended December 31, 1996. The purchase price of the assets and liabilities of
CHS is estimated at $6 million, of which $4.8 million will be borrowed from the
Bank under the new revolving credit facility (see Note 4), and $1.2 million
will be financed by the seller. The Company expects to conclude the
acquisition of CHS in the second quarter of fiscal 1998.
- 40 -
<PAGE> 41
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> 42
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 28, 1997, February 29, 1996 and February 28, 1995 is included in this
report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are denoted by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from,
either (a) Form S-1 Registration Statement under the 1933 Act for Registrant,
Registration No. 2-86049 filed August 24, 1983, as amended by Amendment No. 1
filed September 8, 1983, as amended by Amendment No. 2 (post-effective) filed
September 12, 1984 (referred to as "RS 2-86049"), or (b) Annual Report on Form
10-K for Fiscal Year Ended June 30, 1991 (referred to as "1991 10-K"), or (c)
Annual Report on Form 10-K for fiscal year ended February 28, 1993 (referred to
as "1993 10-K"), or (d) Annual Report on Form 10-K for fiscal year ended
February 28, 1994 (referred to as "1994 10-K"), (e) Annual Report on 10-K for
fiscal year ended February 28, 1995 (referred to as "1995 Form 10-K"), (f)
Annual Report on 10-K for fiscal year ended February 29, 1996 (referred to as
"1996 Form 10-K"), (g) 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 (h) Current Report on Form 8-K dated January 24, 1997.
- 42 -
<PAGE> 43
Exhibit Number Description
*3.1 Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)
*3.2 Articles of Amendment to Articles of Incorporation (Exhibit 3.2
to 1993 10-K)
*3.3 Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)
*3.4 Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993
10-K)
*4.1 Specimen of Common Stock Certificate of ACR Group, Inc. (Exhibit
4.1 to 1993 10-K)
*10.1 Restricted Stock Option Plan, as amended (Exhibit 10.2 to RS
2-86049)
*10.2 Employment Agreement between the Company and Alex Trevino, Jr.
dated May 17, 1993 (Exhibit 10.4 to 1993 10-K)
*10.3 Amendment to Employment Agreement between the Company and Alex
Trevino, Jr. dated as of February 28, 1995 (Exhibit 10.3 to 1995
10-K)
*10.4 Stock Option Agreement between the Company and Alex Trevino, Jr.
dated as of February 28, 1993 (Exhibit 10.11 to 1993 10-K)
*10.5 Note Agreement between The Catalyst Fund, Ltd., as Lender, and
the Company, ACR Supply, Inc., Fabricated Systems, Inc. and
Heating and Cooling Supply, Inc., as Borrowers, dated as of May
27, 1993 (Exhibit 10.18 to 1993 10-K)
10.6 Warrant for the Purchase of 750,000 Shares of Common Stock of
the Company issued to The Catalyst Fund, Ltd. dated April 14,
1997
10.7 Warrant for the Purchase of 250,000 Shares of Common Stock of
the Company issued to St. James Capital Partners, L.P. dated
April 14, 1997
- 43 -
<PAGE> 44
Exhibit Number Description
*10.8 Registration Rights Agreement between The Catalyst Fund, Ltd.
and the Company dated May 27, 1993 (Exhibit 10.20 to 1993 10-K)
*10.9 Loan Agreement by and between the Company and NationsBank of
Texas, N.A. dated as of March 8, 1994 (Exhibit 10.11 to 1994
10-K)
*10.10 First Amendment to Loan Agreement by and between the Company and
NationsBank of Texas, N.A. dated as of October 27, 1994 (Exhibit
10.11 to 1995 Form 10-K).
*10.11 Second Amendment to Loan Agreement by and between the Company
and NationsBank of Texas, N.A. dated as of March 27, 1995
(Exhibit 10.12 to 1995 Form 10-K)
*10.12 Third Amendment to Loan Agreement by and between the Company and
NationsBank of Texas, N.A. dated as of February 20, 1996
(Exhibit 10.11 to 1996 Form 10-K)
*10.13 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)
*10.14 1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS
333-16325)
10.15 Agreement of Purchase and Sale by and between the Company and
St. James Capital Partners, L.P. dated as of January 24, 1997
10.16 10% Convertible Promissory Note of the Company issued to St.
James Capital Partners, L.P. dated as of January 24, 1997
10.17 Warrant to Purchase 280,000 Shares of Common Stock of the
Company issued to St. James Capital Partners, L.P. dated January
24, 1997
- 44 -
<PAGE> 45
Exhibit Number Description
10.18 Registration Rights Agreement between St. James Capital
Partners, L.P. and the Company dated January 24, 1997
10.19 Commitment Letter for $18 Million Credit Facility Issued by
NationsBank of Texas, N.A. for ACR Group, Inc. and Subsidiaries
dated May 12, 1997, as amended effective June 10, 1997
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
(b) Reports on Form 8-K
A report on Form 8-K dated January 24, 1997 was filed to
report the acquisition by the Company of Lifetime Filter, Inc.
(c) Exhibits
See Item 14(a)(3), above.
(d) Financial Statement Schedule
- 45 -
<PAGE> 46
SCHEDULE II
ACR GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29,
1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged Charged to Balance
Beginning to Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended February 28, 1997:
Allowance for doubtful
accounts:
Accounts receivable $459,501 $252,572 $25,000(2) $153,049(1) $584,024
Year ended February 29, 1996:
Allowance for doubtful
accounts:
Accounts receivable 415,455 326,349 70,451(2) 352,754(1) 459,501
Year ended February 28, 1995:
Allowance for doubtful
accounts:
Accounts receivable 293,176 218,052 - 95,773(1) 415,455
</TABLE>
(1) Accounts/notes and related allowance written off.
(2) Allowance related to accounts receivable of acquired companies.
- 46 -
<PAGE> 47
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: June 13, 1997 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.
<TABLE>
<CAPTION>
Signature
<S> <C> <C>
/s/ Alex Trevino, Jr. Chairman of the Board, June 13, 1997
- -------------------------------------
Alex Trevino, Jr. President and
Chief Executive Officer
(Principal executive officer)
/s/ Anthony R. Maresca Senior Vice President, June 13, 1997
- ------------------------------------- Chief Financial Officer
Anthony R. Maresca and Director
(Principal financial and
accounting officer)
/s/ A. Stephen Trevino Director June 13, 1997
- -------------------------------------
A. Stephen Trevino
/s/ Ronald T. Nixon Director June 13, 1997
- -------------------------------------
Ronald T. Nixon
</TABLE>
- 47 -
<PAGE> 48
EXHIBIT INDEX
Exhibit Number Description
10.6 Warrant for the Purchase of 750,000 Shares of Common Stock of
the Company issued to The Catalyst Fund, Ltd. dated April 14,
1997
10.7 Warrant for the Purchase of 250,000 Shares of Common Stock of
the Company issued to St. James Capital Partners, L.P. dated
April 14, 1997
10.15 Agreement of Purchase and Sale by and between the Company and
St. James Capital Partners, L.P. dated as of January 24, 1997
10.16 10% Convertible Promissory Note of the Company issued to St.
James Capital Partners, L.P. dated as of January 24, 1997
10.17 Warrant to Purchase 280,000 Shares of Common Stock of the
Company issued to St. James Capital Partners, L.P. dated January
24, 1997
10.18 Registration Rights Agreement between St. James Capital
Partners, L.P. and the Company dated January 24, 1997
10.19 Commitment Letter for $18 Million Credit Facility Issued by
NationsBank of Texas, N.A. for ACR Group, Inc. and Subsidiaries
dated May 12, 1997, as amended effective June 10, 1997
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.6
THE WARRANT REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD,
ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON
DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE CORPORATION STATING THAT SUCH SALE, ASSIGNMENT OR TRANSFER IS EXEMPT FROM
REGISTRATION UNDER SUCH ACT AND LAWS.
ACR GROUP, INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. 4 750,000 Shares
BY THIS WARRANT (this "Warrant"), ACR Group, Inc., a Texas corporation
(the "Company"), certifies that, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, The Catalyst Fund,
Ltd., a Texas limited partnership (along with its registered assigns, the
"Holder"), is entitled to subscribe for and purchase from the Company, subject
to the terms and conditions set forth herein, at any time on or after the date
hereof but prior to 5:00 p.m. (Houston, Texas time) on August 26, 2001, unless
otherwise extended as provided herein, or, if such date is not a business day,
the next succeeding business day (the "Exercise Period"), 750,000 (subject to
adjustment as set forth herein) fully paid and nonassessable shares (the
"Shares") of the Company's Common Stock, $.01 par value per share (the "Common
Stock"), at a price equal to the exercise price per share, initially $.58594
(subject to adjustment as set forth herein) per share (the "Exercise Price").
1. EXERCISE OF WARRANT; COMPANY OFFICE. This Warrant may be
exercised at any time or from time to time during the Exercise Period as to the
entire number or any lesser number of whole Shares, by the surrender of this
Warrant to the Company at its office at 3200 Wilcrest, #440, Houston, Texas
77042 or such other place as is designated in writing by the Company pursuant
to this Section 1, together with (a) a duly executed election in substantially
the form of Exhibit A attached hereto and made a part hereof for all purposes
and (b) a wire transfer or a certified or bank cashier's check payable to the
order of the Company in an amount equal to the Exercise Price multiplied by the
number of Shares of Common Stock covered by such election. For so long as this
Warrant is outstanding, the Company shall continue to maintain an office in the
State of Texas where notices, presentations and demands in respect of this
Warrant may be made upon it and shall notify the Holder in writing at least 15
days before changing the location of any such office.
<PAGE> 2
2. STOCK OWNERSHIP; STOCK CERTIFICATES; PARTIAL EXERCISE. Upon
each exercise of this Warrant, the Holder shall be deemed to be the holder of
record of the Shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or certificates representing such Shares shall not then have been
actually delivered to the Holder. As soon as possible after each such exercise
of this Warrant, the Company shall issue and deliver to the Holder a
certificate or certificates for the Shares issuable upon such exercise issued
in such denominations as may be specified by the Holder and registered in the
name of the Holder or, subject to Section 9, such other name or names as shall
be designated in the Holder's election to exercise. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the right of the
Holder to purchase the balance of the Shares subject to purchase hereunder on
the terms and conditions set forth herein (including all changes and
adjustments that have occurred hereunder). The Company will, at the time of
each exercise of this Warrant, upon the request of the Holder hereof,
acknowledge in writing its continuing obligation to afford to the Holder all
rights to which the Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant; provided, however,
that if the Holder of this Warrant shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to
afford such rights to the Holder.
3. COMPANY RECORDS; TRANSFEROR ASSIGNMENT OF WARRANT. Exchange of
Warrant. Any warrants issued in connection herewith or in substitution herefor,
upon complete or partial transfer, assignment or exercise (the "Warrants")
shall be numbered and shall be registered in the warrant register of the
Company (the "Warrant Register") as they are issued. The Company shall treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes, except that if the Warrant is properly
transferred or assigned and notice of such transfer or assignment is given to
the Company, the Company shall treat the transferee or assignee as the owner
thereof for all purposes (or, if such transfer or assignment is properly made
in blank, the Company shall treat the bearer of this Warrant as the owner
thereof for all purposes). Should the Holder enter into a written agreement to
sell this Warrant to any Person, the Company shall have a right of first
refusal to purchase this Warrant from the Holder upon the same terms and
conditions set forth in such agreement. Such right of first refusal must be
exercised (by written notice to the Holder), and the purchase of this Warrant
must be consummated, if at all, within 45 days of receiving notice of the
Holder entering into such agreement. If such 45 day period expires without the
exercise of such right and the purchase of this Warrant by the Company, the
Holder shall be free to sell this Warrant to such Person without any liability
whatsoever to the Company. Upon exercise of such right of first refusal or the
expiration of such 45 day period without the Company exercising, such right of
first refusal, the Warrant shall be transferred by the Company upon delivery
thereof duly endorsed by the Holder or by his duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced if requested by the Company in its reasonable
discretion. The Company shall immediately register all assignments and
transfers in the Warrant Register, and, upon any registration of assignment or
transfer, the Company shall deliver a new
2
<PAGE> 3
Warrant or Warrants to the person or entity entitled thereto on the terms and
conditions set forth herein (including all changes and adjustments that have
occurred hereunder). A Warrant, if properly transferred or assigned, may be
exercised by a subsequent Holder without having a new Warrant issued. The
Warrants may be exchanged at the option of the Holder thereof for another
Warrant, or other Warrants, of different denominations and representing in the
aggregate the right to purchase the same number of Shares of Common Stock on
the terms and conditions set forth herein (including all changes and
adjustments that have occurred hereunder) upon surrender to the Company or its
duly authorized agent. All provisions of this Section 3 shall be subject to
Section 13.
4. RESERVED STOCK. The Company shall reserve and keep available at
all times solely for the purpose of providing for the exercise of this Warrant
the maximum number of Shares of Common Stock as to which this Warrant may then
be exercised. All such Shares shall be duly authorized and free of preemptive
rights and, when issued upon such exercise, shall be validly issued and fully
paid and non-assessable with no liability on the part of the holders thereof.
5. CERTAIN ADJUSTMENTS.
(a) Number of Shares; Exercise Price. The number of
Shares of Common Stock which the Holder of this Warrant shall be
entitled to receive upon each exercise hereof shall be determined by
multiplying the number of Shares of Common Stock which would otherwise
(but for the provisions of this Section 5) be issuable upon such
exercise, as designated by the Holder hereof, by a fraction of which
(i) the numerator is $.58594 and (ii) the denominator is the Exercise
Price in effect on the date of such exercise. The Exercise Price shall
be adjusted and readjusted from time to time as provided in this
Section 5 and, as so adjusted or readjusted, shall remain in effect
until a further adjustment or readjustment thereof is required by this
Section 5.
(b) Issuance of Additional Shares of Common Stock or
Certain Convertible Securities. If the Company shall issue any Common
Stock other than Excluded Stock (as hereinafter defined) without
consideration or for a consideration per share less than the fair
market value price per share of Common Stock (as determined by the
Board of Directors of the Company) in effect immediately prior to such
issuance, the Exercise Price in effect immediately prior to each such
issuance shall immediately (except as otherwise expressly provided
below) be reduced to the price determined by multiplying the Exercise
Price in effect immediately prior to such issuance by the quotient
determined by dividing (1) the sum of (x) the product of the total
number of shares of Common Stock outstanding immediately prior to such
issuance multiplied by the fair market value per share of Common Stock
(as determined by the Board of Directors of the Company) in effect
immediately prior to such issuance, and (y) the product of the total
number of shares of Common Stock issued pursuant to such issuance
multiplied by the consideration per share of Common Stock received
under such issuance by (2) the number of shares of Common Stock
outstanding immediately after such issuance multiplied by the fair
market value price per share of Common Stock (as determined by the
Board of Directors of the Company) in effect immediately prior to such
issuance
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<PAGE> 4
For the purposes of any adjustment of the Exercise Price pursuant to
this Section 5(b), the following provisions shall be applicable:
(A) Cash. In the case of the issuance of Common
Stock for cash, the amount of the consideration received by
the Company shall be deemed to be the amount of the cash
proceeds received by the Company for such Common Stock after
deducting therefrom any discounts, commissions, taxes or other
expenses allowed, paid or incurred by the Company for any
underwriting or otherwise in connection with the issuance and
sale thereof
(B) Consideration Other Than Cash. In the case of
the issuance of Common Stock (otherwise than upon the
conversion of shares of capital stock or other securities of
the Company) for a consideration in whole or in part other
than cash, including securities acquired in exchange therefor
(other than securities of the Company that by their terms are
exchangeable for such Common Stock), the consideration other
than cash shall be deemed to be the fair value thereof as
determined in good faith by the Board of Directors of the
Company and irrespective of any accounting treatment;
provided, that such fair value as determined by the Board of
Directors shall not exceed the aggregate Current Market Price
(as hereinafter defined) of the shares of Common Stock being
issued as of the date on which the Board of Directors
authorizes the issuance of such shares.
(C) Options and Convertible Securities. In the
case of the issuance of (i) options, warrants or other rights
to purchase or acquire Common Stock (whether or not at the
time exercisable), (ii) securities by their terms convertible
into or exchangeable for Common Stock (whether or not at the
time so convertible or exchangeable), or (iii) options,
warrants or rights to purchase such convertible or
exchangeable securities (whether or not at the time
exercisable) other than Excluded Stock:
(1) the aggregate maximum number of
shares of Common Stock deliverable upon exercise of
such options, warrants or other rights to purchase or
acquire Common Stock shall be deemed to have been
issued at the time such options, warrants or rights
were issued and for a consideration equal to the
consideration (determined in the manner provided in
subclauses (A) and (B) above), if any, received by
the Company upon the issuance of such options,
warrants or rights plus the minimum purchase price
provided in such options, warrants or rights for the
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<PAGE> 5
Common Stock covered thereby;
(2) the aggregate maximum number of
shares of Common Stock deliverable upon conversion of
or in exchange for any such convertible or
exchangeable securities, or upon the exercise of
options, warrants or other rights to purchase or
acquire such convertible or exchangeable securities
and the subsequent conversion or exchange thereof,
shall be deemed to have been issued at the time such
securities were issued or such options, warrants, or
rights were issued and for a consideration equal to
the consideration, if any, received by the Company
for any such securities and related options, warrants
or rights (excluding any cash received on account of
accrued interest or accrued dividends), plus the
additional consideration (determined in the manner
provided in subclauses (A) and (B) above), if any, to
be received by the Company upon the conversion or
exchange of such securities, or upon the exercise of
any related options, warrants or rights to purchase
or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange
thereof,
(3) on any change in the number of
shares of Common Stock deliverable upon exercise of
any such options, warrants or rights or conversion or
exchange of such convertible or exchangeable
securities or any change in the consideration to be
received by the Company upon such exercise,
conversion or exchange, including, but not limited
to, a change resulting from the anti-dilution
provisions thereof, the Exercise Price as then in
effect shall forthwith be readjusted to such Exercise
Price as would have been obtained had an adjustment
been made upon the issuance of such options, warrants
or rights not exercised prior to such change, or of
such convertible or exchangeable securities not
converted or exchanged prior to such change, upon the
basis of such change;
(4) on the expiration or cancellation of
any such options, warrants or rights or the
termination of the right to convert or exchange such
convertible or
5
<PAGE> 6
exchangeable securities, if the Exercise Price shall
have been adjusted upon the issuance thereof, the
Exercise Price shall forthwith be readjusted to such
Exercise Price as would have been obtained had an
adjustment been made upon the issuance of such
options, warrants, rights or such convertible or
exchangeable securities on the basis of the issuance
of only the number of shares of Common Stock actually
issued upon the exercise of such options, warrants or
rights, or upon the conversion or exchange of such
convertible or exchangeable securities; and
(5) if the Exercise Price shall have
been adjusted upon the issuance of any such options,
warrants, rights or convertible or exchangeable
securities, no further adjustment of the Exercise
Price shall be made for the actual issuance of Common
Stock upon the exercise, conversion or exchange
thereof
(D) Excluded Stock. "Excluded Stock" shall mean
(1) up to 200,000 shares of Common Stock to be issued from
time to time to directors, officers, employees, consultants,
advisors, independent contractors and agents of the Company
pursuant to stock options, employee benefit plans or otherwise
together with any such shares that are repurchased by the
Company and reissued to any such recipient, (2) shares of
Common Stock to be issued from time to time pursuant to stock
options granted by the Company prior to April 14, 1997, (3)
up to 25,985 shares of Common Stock to be to A. Stephen
Trevino, (4) up to 550,000 shares of Common Stock which may be
issued to Alex Trevino, Jr. pursuant to that certain
employment agreement entered into between the Company and Alex
Trevino, Jr. dated as of May 17, 1993, (5) up to 500,000
shares of Common Stock to be issued from time to time pursuant
to the 1996 Stock Option Plan of the Company, (6) up to
1,000,000 shares of Common Stock to be issued pursuant to
warrants Issued by the Company to St. James Capital Partners,
L.P., a Delaware limited partnership ("St. James"), or its
assigns, and (7) shares of Common Stock to be issued to St.
James, or its assigns, pursuant to private placement purchases
by St. James of either Common Stock or debt instruments of the
Company which are convertible into Common Stock, in an
aggregate amount not to exceed $5,000,000. All shares of
Excluded Stock that the Company has reserved for issuance
shall be deemed to be outstanding for all purposes of
computations under this Section 5(b).
(c) Stock Dividends, Subdivisions, Reclassifications or
Combinations.
6
<PAGE> 7
If the Company shall (i) declare a dividend or make a distribution on
its Common Stock in shares of its Common Stock, (ii) subdivide or
reclassify the outstanding shares of Common Stock into a greater
number of shares, or (iii) combine or reclassify the outstanding
Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder
of this Warrant who exercises this Warrant after such date shall be
entitled to receive the number of shares of Common Stock which he
would have owned or been entitled to receive had this Warrant been
exercised immediately prior to such date. Successive adjustments in
the Exercise Price shall be made whenever any event specified above
shall occur.
(d) Other Distributions. In case the Company shall fix a
record date for the making of a distribution to all holders of shares
of its Common Stock (i) of shares of any class other than its Common
Stock or (ii) of evidence of indebtedness of the Company or any
subsidiary or (iii) of assets (excluding cash dividends or
distributions, and dividends or distributions referred to in Section
5(c) above) or (iv) of rights or warrants (excluding those referred to
in Section 5(b)), in each case the Exercise Price in effect
immediately prior thereto shall be multiplied by the &action
determined by dividing (A) an amount equal to the difference
resulting Tom (x) fair market value price per share of Common Stock on
such record date, less (y) the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive) of said
shares or evidences of indebtedness or assets or rights or warrants to
be so distributed divided by the number of shares of Common Stock
outstanding on such record date, by (B) the fair market value price
per share of Common Stock on such record date. Such adjustment shall
be made successively whenever such a record date is fixed. In the
event that such distribution is not so made, the Exercise Price then
in effect shall be readjusted, effective as of the date when the Board
of Directors determines not to distribute such shares, evidence of
indebtedness, assets, rights or warrants, as the case may be, to the
Exercise Price which would then be in effect if such record date had
not been fixed.
(e) Other Dilutive Events. In case any event shall occur
as to which the provisions of this Section 5 are not strictly
applicable but the failure to make any adjustment relating thereto
would not fairly protect the purchase rights represented by this
Warrant in accordance with the essential intent and principles of this
Section 5, then, in each such case, the Company shall immediately
make all adjustments necessary to preserve, without dilution, the
purchase rights represented by this Warrant on a basis consistent with
the intent and principles established in this Section 5 and shall also
immediately appoint a firm of independent certified public accountants
of recognized national standing (which may be the regular auditors of
the Company if they satisfy such standard), which shall give their
opinion that such adjustment, if any, preserves, without dilution, the
purchase rights represented by this Warrant on a basis consistent with
the intent and principles established in this Section 5. Upon receipt
of such opinion, the Company will immediately deliver a copy thereof
to the Holder of this Warrant. The Company shall not, by amendment of
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<PAGE> 8
its certificate of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of
securities or any other voluntary avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and
will at all times in good faith assist in carrying out all of such
terms and in the taking of all such actions as may be necessary or
appropriate in order to protect the rights of the Holder of this
Warrant against dilution or other impairment. Without limiting the
generality of the foregoing, the Company (i) will not permit the par
value of any shares of stock receivable upon the exercise of this
Warrant to exceed the amount payable therefor upon such exercise, (ii)
will take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and
nonassessable shares of stock on the exercise of the Warrants from
time to time outstanding, and (iii) will not take any action that
results in any adjustment of the Exercise Price if the total number of
Shares of Common Stock issuable after such action upon the exercise of
all of the Warrants would exceed the total number of Shares of Common
Stock then authorized by the Company's certificate of incorporation
and available for the purpose of issuance upon such exercise.
(f) Size of Adjustment; Rounding. No adjustment in the
Exercise Price shall be required unless such adjustment would require
an increase or decrease of at least one cent ($.01) in such price;
provided, however, that any adjustment that is thereby not required to
be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 5 shall be
made to the nearest cent or to the nearest one-hundredth of a Share,
as the case may be.
(g) Notice. Whenever there shall be an adjustment as
provided in this Section 5, the Company shall within three (3) days
cause written notice thereof to be given to the Holder, which notice
shall be accompanied by an officer's certificate setting forth the
Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation
thereof. However, the failure by the Company to satisfy its
obligations under this Section 5(g) shall not in any manner affect or
alter the rights of the Holder under this Warrant.
(h) Fractional Shares. The Company shall not be required
to issue fractions of shares of Common Stock or other capital stock of
the Company upon the exercise of Warrants. If any fraction of a share
would be issuable upon the exercise of any Warrant (or specified
portions thereof), the Company shall purchase such fraction for an
amount in cash equal to the same fraction of the fair value of such
share of Common Stock (as determined in good faith by the Board of
Directors of the Company but not less than the fair market value) on
the date of exercise of the Warrant.
(i) Current Market Price. The Current Market Price at any
date shall mean, in the event the Common Stock is publicly traded, the
average of the daily closing prices per share of Common Stock for 30
consecutive trading days ending no more than 5 trading days before
such date (as adjusted for any stock dividend, split,
8
<PAGE> 9
combination or reclassification that took effect during such 30
trading day period), as determined by the Board of Directors of the
Company. The closing price for each day shall be the last reported
sale price regular way or, in case no such reported sale takes place
on such day, the average of the last closing bid and asked prices
regular way, in either case on the principal national securities
exchange on which the Common Stock is listed or admitted to trading,
or if not listed or admitted to trading on any national securities
exchange, the closing sale price for such day reported by NASDAQ, if
the Common Stock is traded over-the-counter and quoted in the National
Market System, or if the Common Stock is so traded, but not so quoted,
the average of the closing reported bid and asked prices of the Common
Stock as reported by NASDAQ or any comparable system or, if the Common
Stock is not listed on NASDAQ or any comparable system, the average of
the closing bid and asked prices as furnished by two members of the
National Association of Securities Dealers, Inc. selected from time to
time by the Company for that purpose. If the Common Stock is not
traded in such manner that the quotations referred to above are
available for the period required hereunder, the Current Market Price
per share of Common Stock shall be deemed to be the fair value as
determined by the Board of Directors of the Company in good faith and
irrespective of any accounting treatment.
(j) Treasury Stock. For the purposes of this Section 5,
the sale or other disposition of any Common Stock theretofore held in
the Company's treasury shall be deemed to be an issue thereof
(k) Valid Issuance. All shares of Common Stock which may be
issued upon the exercise of this Warrant will upon issuance by the
Company be duly and validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance
thereof, and the Company shall take no action which will cause a
contrary result (including, without limitation, any action which would
cause the Exercise Price to be less than the par value, if any, of the
Common Stock).
6. PREEMPTIVE RIGHTS. If the Company shall issue any Shares of
Common Stock, rights, options, or warrants to purchase Shares of Common Stock,
or securities of any type whatsoever that are, or may become, convertible into
Shares of Common Stock (collectively, "New Securities," which term shall
exclude any Excluded Stock), the Holder of this Warrant shall be entitled to
purchase its pro rata share of all or any part of such New Securities as
provided in this Section 6. For purposes of this Section 6, the term "pro rata
share" shall mean such share as would be necessary to permit the Holder to
maintain a percentage interest in the Company (determined on a fully diluted
basis assuming the exercise of any and all outstanding options or warrants and
the conversion of any securities convertible into Shares of Common Stock) equal
to the Holder's percentage interest in the Company immediately prior to such
issuance of New Securities (determined on a fully diluted basis). In the event
the Company proposes to undertake an issuance of New Securities, it shall give
the Holder written notice of its intention, describing the type of New
Securities and the price and terms upon which the Company proposes to issue the
same. The Holder shall have 30 days from the date of receipt of any such notice
to agree to purchase up to its pro rata share of such New Securities for the
price and upon the terms specified in the notice by giving written notice to
the Company and stating therein the quantity of New Securities to be purchased.
In the event
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<PAGE> 10
the Holder fails to exercise such right of purchase within said 30-day period,
the Company shall have 90 days thereafter to complete the sale of the New
Securities at the price and upon terms no more favorable to the purchasers of
such New Securities than those specified in the Company's notice to the Holder.
In the event the Company has not sold the New Securities within such 90-day
period, the Company shall not thereafter issue or sell any of such New
Securities without first complying with the terms of this Section 6.
7. PUT OPTIONS.
(a) Option based on Purchase Offer for Assets. The
Company shall notify the Holder promptly, and in any event within five
days of receipt, of any bona fide written offer received by the
Company for the purchase of all or substantially all of the Company's
assets or its stock (each an "Offer"). Should the Company determine
that an Offer is unacceptable, the Holder shall have the option to
require the Company to purchase this Warrant and/or the Shares of
Common Stock issued pursuant hereto (or any portion thereof) at a
price determined by multiplying (i) the total consideration offered
for the Company's assets or stock, as applicable, under such Offer,
multiplied by, if such Offer is for less than all of the Company's
assets or stock, as applicable, a &action, the numerator of which is
the market value of all of the Company's assets or stock, as
applicable, as determined by the board of directors of the Company,
which number shall in no event be less than the total consideration
offered under the Offer, and the denominator of which is the total
consideration offered under the Offer, by (ii) the percentage
ownership of the Common Stock of the Company represented by this
Warrant and the Shares of Common Stock issued pursuant hereto that the
Holder wishes to require the Company to purchase under this Section
7(a) (expressed as a decimal and calculated on a fully diluted basis).
The price to be paid to the Holder shall be reduced if the Holder has
elected to require the Company to purchase any unissued Shares of
Common Stock evidenced by this Warrant by an amount equal to (iii) the
Exercise Price then in effect, multiplied by (iv) the number of
unissued Shares of Common Stock evidenced by this Warrant that the
Holder has elected to require the Company to purchase. Unless
otherwise agreed to in writing by the Holder, the required purchase
price shall be payable in cash within 60 days of the Company's receipt
of notice of the Holder's election to require the Company to purchase
this Warrant and/or the Shares of Common Stock issued pursuant hereto
(or any portion thereof) under this Section 7(a). If at any time the
Company has not paid the required purchase price after the Holder has
exercised its option under this Section 7(a), the Holder, in addition
to having the right to enforce the payment of such required purchase
price, shall also have the right, if the Company shall after the
receipt of such first Offer receive a later Offer that the Holder
deems more favorable than such first Offer, to rescind its election
under the first Offer and require the Company to purchase this Warrant
and/or the Shares of Common Stock issued pursuant hereto (or any
portion thereof) under the terms of such later Offer in accordance
with the terms and procedures set forth above. This option shall be a
continuing option, exercisable as many times as the Holder shall
choose, and shall continue and remain until the Holder has sold all
unissued Shares of Common Stock evidenced by this Warrant and all
Shares of Common Stock issued
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<PAGE> 11
hereunder to the Company.
(b) General Option. At any time after the period
beginning on May 26, 1996, upon 90 days prior written notice to the
Company (such notice being herein referred to as the "Put Notice"),
provided the Company's stock is no longer publicly traded, the Holder
shall have the option to require the Company to purchase this Warrant
and/or the Shares of Common Stock issued pursuant hereto (or any
portion thereof) for a price equal to the product of (i) the
percentage ownership of the Common Stock of the Company represented by
this Warrant and the Shares of Common Stock issued pursuant hereto
that the Holder wishes to require the Company to purchase under this
Section 7(b) (expressed as a decimal and calculated on a fully diluted
basis), and (ii) the greater of the following values, all calculated
as of the last day of the month immediately preceding the date the Put
Notice is delivered to the Company (A) 150% of the net book value of
the Company, (B) 400% of the earnings before interest, taxes,
depreciation and amortization (less any outstanding funded debt to The
Catalyst Fund, Ltd. and other lenders) ("EBITDA") of the Company for
the preceding 24 month period ended on the last day of the month
immediately preceding, the date the Put Notice is delivered to the
Company, or (C) at the option of the Holder, the appraised value of
the Company. The appraised value of the Company shall be determined as
of the last day of the month immediately preceding the date the Put
Notice is delivered to the Company in the following manner: First,
the Holder shall select and pay for an appraisal of the Company
performed by a certified appraiser (the "First Appraisal"). The
appraised value of the Company as determined by the First Appraisal
shall be binding upon the Company and the Holder as the appraised
value of the Company unless the Company shall notify the Holder in
writing of its objection to such appraised value within 30 days of the
Company's receipt of notice of such appraised value (the "First
Appraisal Notice"). If the Company so notifies the Holder, the
appraised value of the Company determined by the First Appraisal shall
nevertheless remain the appraised value of the Company unless the
Company shall pay for and obtain a second appraisal of the Company
from a certified appraiser (the "Second Appraisal") and deliver such
Second Appraisal to the Holder within 30 days of receipt of the First
Appraisal Notice. If the Company complies with the requirements of the
preceding sentence, the Second Appraisal shall be binding upon the
Company and the Holder as the appraised value of the Company unless
the Holder shall notify the Company of its objection to such Second
Appraisal within 30 days of the Holder's receipt of the Second
Appraisal. If the Holder so notifies the Company, the Company and the
Holder shall appoint a third certified appraiser to determine the value
of the company, and if the Company and the Holder cannot reach an
agreement as to such third certified appraiser, the Company and the
Holder shall appoint a third party to appoint a third certified
appraiser, which determination of appraiser shall be binding upon the
Company and the Holder. The appraisal determined by such third
appraiser (the "Third Appraisals) shall be binding upon the Company
and the Holder and shall be the appraised value of the Company. The
Company and the Holder shall bear equally all costs of such Third
Appraisal. The price to be paid to the Holder shall be reduced if the
Holder has elected to require the Company to purchase any unissued
Shares of Common Stock evidenced by this
11
<PAGE> 12
Warrant by an amount equal to (iii) the Exercise Price then in
effect, multiplied by (iv) the number of unissued Shares of Common
Stock evidenced by this Warrant that the Holder has elected to require
the Company to purchase. Unless otherwise agreed to in writing by the
Holder, the required purchase price shall be payable in cash within 75
days of the Company's receipt of notice of the Holder's election to
require the Company to purchase unissued Shares of Common Stock
evidenced by this Warrant and/or Shares of Common Stock issued
pursuant hereto (or any portion thereof) under this Section 7(b). This
option shall be a continuing option, exercisable as many times as the
Holder shall choose, and shall continue and remain until the Holder
has sold all unissued Shares of Common Stock evidenced by this Warrant
and all Shares of Common Stock issued hereunder to the Company.
(c) Purchase by Third Party. At the option of the board
of directors of the Company, the Company may allow all, or any portion
greater than 25 percent, of the Warrant or any Common Stock required
to be purchased by the Company pursuant to Section 7(a) or 7(b) above,
to be purchased directly by any of the Company's shareholders
provided, however, that should any of the Company's shareholders fail
to make payment of the required purchase price on the designated
purchase date, the Company shall be required to purchase such portion
of this Warrant or such Common Stock intended to be purchased by such
shareholders of the Company.
8. CERTAIN CORPORATE EVENTS OR ACTIONS.
(a) Consolidation, Merger, Etc. In case of any
consolidation with or merger of the Company with or into another
corporation or other entity (except for a merger or consolidation in
which the Company is the continuing corporation other than as a
subsidiary of another corporation or other entity), or in case of any
sale, lease or conveyance to another corporation or other entity of
the property of the Company as an entirety or substantially as an
entirety, such successor, purchasing, leasing or receiving corporation
or other entity, as the case may be, shall, prior to and as a
condition to the occurrence of such event, (i) execute with the Holder
an agreement providing that the Holder shall have the right thereafter
to receive upon exercise of this Warrant the kind and amount of shares
of stock and other securities, property, cash or any combination
thereof receivable upon such consolidation, merger, sale, lease or
conveyance by a holder of the number of Shares of Common Stock for
which this Warrant might have been exercised immediately prior to such
consolidation, merger, sale, lease or conveyance and (ii) make
effective provision in its certificate of incorporation or otherwise,
if needed, in order to effect such agreement. Such agreement shall
provide for adjustments which shall be equivalent to the adjustments
in Section 5.
(b) Reclassification, Etc. In case of any
reclassification or change of the Shares of Common Stock issuable upon
exercise of this Warrant or in case of any consolidation or merger of
another corporation or other entity with or into the Company in which
the Company is the continuing corporation (other than as a subsidiary
of another corporation or other entity) and in which there is a
12
<PAGE> 13
reclassification or change (including a change to the right to receive
cash or other property) of the Shares of Common Stock, the Holder
shall have the right thereafter to receive upon exercise of this
Warrant the kind and amount of shares of stock and other securities,
property, cash or any combination thereof receivable upon such
reclassification, change, consolidation or merger by a holder of the
number of Shares of Common Stock into which this Warrant would have
been exercisable immediately prior to such reclassification, change,
consolidation or merger. Thereafter, appropriate provision (as
determined by the Board of Directors of the Company in good faith)
shall be made for adjustments which shall be equivalent to the
adjustments in Section 5.
9. CERTAIN RESTRICTIONS. Notwithstanding the adjustment
provisions contained in this Warrant, the Company shall not take any of the
following actions without first receiving the express written consent of the
Holder:
(a) Except for the issuance of up to 550,000 shares of
Common Stock which may be issued to Alex Trevino, Jr. pursuant to that certain
employment agreement entered into between the Company and Alex Trevino, Jr.
dated as of May 17, 1993, issue Common Stock (otherwise than upon the
conversion of shares of capital stock or other securities of the Company) for a
consideration in whole or in part other than cash, including securities
acquired in exchange therefor (other than securities of the Company that by
their terms are exchangeable for such Common Stock).
(b) Make a distribution to all holders of shares of its
Common Stock of (i) shares of any class other than its Common Stock, (ii)
evidence of indebtedness of the Company or any subsidiary, or (iii) assets
(excluding cash dividends or distributions, and dividends or distributions
referred to in Section 5(c)), or (iv) of rights or warrants (excluding those
referred to in Section 5(b).
(c) Enter into any consolidation with or merger with or
into another corporation or other entity (except for a merger or consolidation
in which the Company is the continuing corporation other than as a subsidiary
of another corporation or other entity), or enter into any sale, lease or
conveyance to another corporation or other entity of the property of the
Company as an entirety or substantially as an entirety.
10. EXTENSION OF EXPIRATION DATE. If the last scheduled payment
date for the repayment of outstanding indebtedness under any of those certain
promissory notes (the "Notes"), dated April 14, 1997 executed by West Coast
HVAC Supply, Inc., a Texas corporation, in the aggregate original principal
amount of $450,000 and the others of which are each dated May 26, 1993 executed
by ACR Supply, Inc., a Texas corporation, Fabricated Systems, Inc., a Texas
corporation, and Heating and Cooling Supply, Inc., a Nevada corporation, and
payable to the order of The Catalyst Fund, Ltd., a Texas limited partnership,
in the aggregate original principal amount of $1,000,000 shall be extended
beyond August 26, 2001, then the expiration date of this Warrant shall also be
likewise extended to the date that is equal to the latest of the last scheduled
payment dates under any of the Notes. Notwithstanding the preceding sentence,
in the event the entire amount of principal and
13
<PAGE> 14
interest on the Notes is fully repaid prior to August 26, 2001, then the
expiration date of this Warrant shall expire thirty (30) days after the date of
such payment; provided, however, that under no circumstances shall the
expiration date be earlier than May 26, 1999; and further provided that if the
date of the complete payment of all of the Notes is during the time period of
April 27, 1999 through May 26, 1999, then the Warrant expiration date shall
occur thirty (30) days after such payment date. Additionally, if the Holder has
exercised any put option under Section 7 of this Agreement and (a) the Company
is financially unable, or in any event fails, to timely pay all of the required
purchase price under Section 7, or (b) or any creditor of the Company has
indicated to the Holder or the Company that the payment of such required
purchase price would be a default under the Company's indebtedness to such
creditor, then the expiration date of this Warrant shall be extended to the
date that is three and one-half years beyond the then expiration date of this
Warrant for any portion of this Warrant not purchased by the Company (including
any portion of this Warrant that the Holder has not required the Company to
purchase under Section 7), and the Holder shall be deemed to have retracted its
exercise of such put option; provided, however, that such retraction shall be
without prejudice to the Holder, and the Holder shall be entitled, at any time
thereafter prior to the expiration of this Warrant, to re-exercise such put
option upon the same term is of the prior exercise thereof upon the terms and
conditions set forth in Section 7.
11. CERTAIN NOTICES. In case at any time the Company shall propose
or have knowledge of any proposal,
(a) to pay any dividend or make any distribution on
Shares of Common Stock or to fix a record date for the making of any
such dividend or distribution to holders of Common Stock; or
(b) to take, or fix a record date for, any action that would
result in any adjustment to the Exercise Price pursuant to Section 5;
or
(c) to effect any reclassification or change of
outstanding Shares of Common Stock, or consolidation or merger, or
sale, lease or conveyance of property, of the type addressed in
Section 8; or
(d) to effect any voluntary or involuntary liquidation,
dissolution or winding up of the Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof to the Holder at least 30 days prior to the date on which (i)
the books of the Company shall close or a record date shall be set, for any
such action described in Section 11 (a) or (b) or (ii) such reclassification,
change, consolidation, merger, sale, lease, conveyance, liquidation,
dissolution or winding-up shall be effective, as the case may be.
12. EXPENSES. The Company shall pay all costs, fees, taxes (other
than stock transfer taxes) and expenses payable in connection with the
preparation, issuance and delivery from time to time of Warrants and of Shares
of Common Stock issued upon the exercise of Warrants.
14
<PAGE> 15
13. RESTRICTIONS ON TRANSFER. This Warrant and the Shares of
Common Stock or other securities issued upon exercise of this Warrant shall be
subject to a stop-transfer order (except with respect to a transfer by the
original Holder of this Warrant to its partners) and the certificate or
certificates evidencing any such Shares or securities shall bear the following
legend, unless in the opinion Of counsel to the Holder exercising any Warrant
such legend is not required in order to comply with the Securities Act of 1933,
as amended (the "Securities Act"), which opinion shall be reasonably
satisfactory to the Company, or unless the offering and sale of the Shares or
other securities issued upon exercise of the Warrants have been registered
under the Securities Act, and in each such case such restriction on transfer
and legend shall be removed:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED OR OTHERWISE
TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO THE CORPORATION
OF AN OPINION OF counsel REASONABLY SATISFACTORY TO THE CORPORATION STATING
THAT SUCH SALE, ASSIGNMENT OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER SUCH
ACT AND LAWS."
14. REGISTRATION OF COMMON STOCK, LISTING. If any Shares of Common
Stock required to be reserved for purposes of exercise of this Warrant required
registration with or approval of any governmental authority under any federal
or state law before such Shares may be issued upon exercise, the Company will,
at its expense and as expeditiously as possible, cause such Shares to be duly
registered or approved, as the case may be. At any such time as Common Stock is
listed for trading, the Company will, at its expense, obtain promptly and
maintain the approval of all securities exchanges (including, for this purpose,
NASDAQ and the NASDAQ National Market System) on which the Common Stock is
listed for trading for an additional listing, upon official notice of issuance,
of the Shares of Common Stock issuable upon exercise of the then outstanding
Warrants and maintain the listing of such shares after their issuance.
15. AVAILABILITY OF INFORMATION. (a) If the Company shall have
filed a registration statement pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or a registration
statement pursuant to the Securities Act, the Company will comply with the
reporting requirements of Sections 13 and 15(d) of the Exchange Act (or, if the
Company is not required to so comply and it shall have so filed such a
registration statement, it will make publicly available the information
specified by Rule 144(c)(2) under the Securities Act) and will comply with all
other public information reporting requirements of the Securities and Exchange
Commission (the "Commission") (including Rule 144 promulgated by the Commission
under the Securities Act) from time to time in effect and relating to the
availability of an exemption from the Securities Act for the sale of any
restricted securities (as defined in the Securities Act) or the sale of
securities by affiliates (as defined in the Securities Act). The Company will
also cooperate with each holder of any restricted securities in supplying such
information as may be necessary for such holder to
15
<PAGE> 16
complete and file any information reporting forms presently or hereafter
required by the Commission as a condition to the availability of an exemption
from the Securities Act for the sale of any restricted securities or the sale
of securities by affiliates. The Company will furnish to each Holder of a
Warrant, promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent or made available
generally by the Company to its stockholders, and copies of all regular and
periodic reports and all registration statements and prospectuses filed by the
Company with any securities exchange or with the Commission. The Company will
also furnish each Holder with copies of all minutes of all meetings of the
Company's board of directors or any committee thereof, forthwith after such
minutes have been prepared.
(b) The Holder agrees to accept and maintain on a confidential
basis as provided in this Section 15(b), all information obtained by it
pursuant to Section 15(a) or otherwise under this Agreement (such information
is referred to for purposes of this Section 15(b) as "Information"). The Holder
agrees that unless it receives the express written permission of the Company or
is otherwise required to make disclosure by law, a regulation of a national
stock exchange or any other industry self-regulating body (referred to
collectively for purposes in this Section 15(b) as "Law"), the Holder will not
disclose, publish or reveal any of the Information except to those of its
employees, agents or representatives as have a need to know and who have
agreed to maintain the confidentiality of the Information. Except as may be
required by Law, the Holder will not disclose any of the Information to third
parties. The Holder agrees, and it will advise all employees, agents and
representatives who have access to the Information, that the United States
securities laws may prohibit any Person who has received material, non-public
information with respect to an issuer from purchasing or selling securities of
such issuer or from communicating such information to any other Person. The
responsibility of the Holder with respect to Information received from Company
and/or its subsidiaries shall terminate as to such of the Information as
becomes public knowledge by publication or general knowledge in the trade
through no fault of the Holder, its employees, agents or representatives.
Notwithstanding anything to the contrary in this Section 15(b), the Holder may,
(i) with respect to any prospective purchaser of the Warrant (or any portion
thereof) that is not a direct competitor of the Company or any of its
subsidiaries (each such prospective purchaser being hereinafter referred to as
a "Company Competitors), after written notice to the Company on or before the
10th day prior to disclosure, disclose Information to any such prospective
purchaser; provided, however, that the Holder may immediately disclose
Information to any such Person upon the occurrence and continuance of any Event
of Default (as such term is defined in that certain Note Agreement of even date
herewith to which the Company and the Holder are parties (among other parties)
(the "Note Agreement"); (ii) with respect to any prospective purchaser of the
Warrant (or any portion thereon that is a Company Competitor, upon the
occurrence and continuance of any Event of Default (as such term is defined in
the Note Agreement), disclose Information to any such prospective purchaser;
(iii) disclose Information to the Holder's legal counsel or auditors, so long
as such disclosures are held in confidence by the recipients thereof, and (iv)
so long as The Catalyst Fund, Ltd. is a Person constituting the Holder,
disclose information to any Person who is an equity investor in The Catalyst
Fund, Ltd.
16
<PAGE> 17
16. LOSS, THEM, ETC. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of any Warrant and upon
surrender and cancellation of any Warrant if mutilated, the Company shall
execute and deliver to the Holder thereof a new Warrant in the form and
substance of the lost, stolen, destroyed or mutilated Warrant (including all
changes and adjustments that have occurred hereunder).
17. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. Nothing contained
in this Warrant shall be construed as conferring upon the Holder hereof any
rights as a stockholder of the Company or as imposing any obligation upon such
Holder to purchase any securities or as imposing any liability upon such Holder
as a stockholder of the Company, whether such obligation or liability is
asserted by the Company or by creditors of the Company at law or in equity.
18. GOVERNING LAW. This Warrant shall be governed by and construed
in accordance with the internal laws of the State of Texas.
19. REMEDIES. The Company stipulates that the remedies at law of
the Holder of this Warrant in the event of any default or threatened default by
the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that, to the extent permitted by
applicable law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise; provided, however,
that (i) the Company shall not seek specific enforcement of its rights under
this Warrant unless the Holder is acting in contravention of its obligations or
outside of its rights under this Warrant and (ii) the Company hereby agrees to
indemnify and hold harmless the Holder from any costs, liabilities, losses or
expenses incurred by the Holder caused by or otherwise associated with a claim
by the Company for specific enforcement of its rights under this Warrant if
such claim is not a claim permitted to be made pursuant to clause (i)
immediately preceding.
20. NOTICES. All notices and other communications provided for
herein shall be delivered or mailed by registered or certified mail, return
receipt requested, postage prepaid, addressed (a) if to any Holder of any
Warrant, to the address of such Holder as set forth in the Warrant Register or
to such other address as such Holder has notified the Company of in writing, or
(b) if to the Company, to the address set forth in Section 1 or to such other
address as the Company has notified such Holder of pursuant to Section 1 and
this Section 20; provided, however, that the exercise of any Warrant shall be
effective in the manner provided in Section 1. All notices given pursuant to
this Warrant shall be deemed to be effective upon receipt thereof by the party
to whom such notice is addressed.
21. REPRESENTATIONS AND WARRANTIES. In order to induce the
acquisition of this Warrant by the Holder, the Company hereby represents and
warrants to the Holder that the representations and warranties of the Company
contained in the Note Agreement are true and correct in all respects as of the
date hereof (with all references in such representations and warranties to the
"Note" or "Notes" mean in this Warrant and all references in such
representations and warranties to the "Subject Documents" meaning this Warrant
and the
17
<PAGE> 18
Registration Rights Agreement of even date herewith between the Company and the
Holder. The Holder hereby represents and warrants to the Company that it has
not purchased or sold any securities of the Company within the 60-day period
preceding the date hereof.
22. MISCELLANEOUS. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. Any provision of this Warrant that shall be
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the Company waives any provision of law that shall render
any provision hereof prohibited or unenforceable in any respect. The section
and paragraph headings used in this Warrant are inserted for convenience only
and shall not be used for any interpretive purpose.
THIS WARRANT IS ISSUED IN SUBSTITUTION FOR AND REPLACEMENT OF THAT
CERTAIN WARRANT NO. 2 ISSUED BY THE COMPANY TO THE HOLDER DATED OCTOBER 6,
1996, SUCH WARRANT NO. 2 BEING HEREBY DEEMED CANCELLED.
18
<PAGE> 19
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and attested by its Secretary.
Dated: April 14, 1997 ACR GROUP, INC.
By: /s/ ALEX TREVINO, JR
-------------------------
Alex Trevino, Jr.
President
Attest:
/s/ ANTHONY R. MARESCA
- -------------------------------
Anthony R. Maresca, Secretary
19
<PAGE> 20
EXHIBIT A TO WARRANT
To: ACR Group, Inc.
3200 Wilcrest, #440
Houston, Texas 77042
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to subscribe for
_____________ Shares of Common Stock covered by the within Warrant and tenders
payment herewith in the amount of $_______________ in accordance with the terms
thereof, and requests that certificates for such shares in the following
denominations be issued in the name of, and delivered to, the person[s] at
the following address[es]:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
(Print Address[es] and Social Security Number[s] or Employer
Identification Number[s] as applicable)
and, if said number of shares shall not be all the shares covered by
the within Warrant, that a new Warrant for the balance remaining of the shares
covered by the within Warrant be registered in the name of, and delivered to,
the undersigned at the address stated below:
Date: Name:
-------------------- -----------------------------
(Print)
----------------------------------
(Signature)
Address:
--------------------------
--------------------------
--------------------------
20
<PAGE> 1
EXHIBIT 10.7
THE WARRANT REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD,
ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON
DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE CORPORATION STATING THAT SUCH SALE, ASSIGNMENT OR TRANSFER IS EXEMPT FROM
REGISTRATION UNDER SUCH ACT AND LAWS.
ACR GROUP, INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. 5 250,000 Shares
BY THIS WARRANT (this "Warrant"), ACR Group, Inc., a Texas corporation
(the "Company"), certifies that, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, St. James Capital
Partners, L.P., a Delaware limited partnership (along with its registered
assigns, the "Holder"), is entitled to subscribe for and purchase from the
Company, subject to the terms and conditions set forth herein, at any time on
or after the date hereof but prior to 5:00 p.m. (Houston, Texas time) on May
26, 1999, unless otherwise extended as provided herein, or, if such date is not
a business day, the next succeeding business day (the "Exercise Period"),
250,000 (subject to adjustment as set forth herein) fully paid and
non-assessable shares (the "Shares") of the Company's Common Stock, $.01 par
value per share (the "Common Stock"), at a price equal to the exercise price
per share, initially $.58594 (subject to adjustment as set forth herein) per
share (the "Exercise Price").
1. EXERCISE OF WARRANT; COMPANY OFFICE. This Warrant may be
exercised at any time or from time to time during the Exercise Period as to the
entire number or any lesser number of whole Shares, by the surrender of this
Warrant to the Company at its office at 3200 Wilcrest, #440, Houston, Texas
77042 or such other place as is designated in writing by the Company pursuant
to this Section 1, together with (a) a duly executed election in substantially
the form of Exhibit A attached hereto and made a part hereof for all purposes
and (b) a wire transfer or a certified or bank cashier's check payable to the
order of the Company in an amount equal to the Exercise Price multiplied by the
number of Shares of Common Stock covered by such election. For so long as this
Warrant is outstanding, the Company shall continue to maintain an office in the
State of Texas where notices, presentations and demands in respect of this
Warrant may be made upon it and shall notify the Holder in writing at least 15
days before changing the location of any such office.
2. STOCK OWNERSHIP; STOCK CERTIFICATES; PARTIAL EXERCISE. Upon
each exercise of this Warrant, the Holder shall be deemed to be the holder of
record of the Shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or certificates representing such Shares shall not then have been
actually
<PAGE> 2
delivered to the Holder. As soon as possible after each such exercise of this
Warrant, the Company shall issue and deliver to the Holder a certificate or
certificates for the Shares issuable upon such exercise issued in such
denominations as may be specified by the Holder and registered in the name of
the Holder or, subject to Section 9, such other name or names as shall be
designated in the Holder's election to exercise. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the right of the
Holder to purchase the balance of the Shares subject to purchase hereunder on
the terms and conditions set forth herein (including all changes and
adjustments that have occurred hereunder). The Company will, at the time of
each exercise of this Warrant, upon the request of the Holder hereof,
acknowledge in writing its continuing obligation to afford to the Holder all
rights to which the Holder shall continue to be entitled after such exercise in
accordance with the terms of this Warrant; provided, however, that if the
Holder of this Warrant shall fail to make any such request, such failure shall
not affect the continuing obligation of the Company to afford such rights to
the Holder.
3. COMPANY RECORDS; TRANSFER OR ASSIGNMENT OF WARRANT; EXCHANGE
OF WARRANT. Any warrants issued in connection herewith or in substitution
herefor, upon complete or partial transfer, assignment or exercise (the
"Warrants") shall be numbered and shall be registered in the warrant register
of the Company (the "Warrant Register") as they are issued. The Company shall
treat the registered holder of any Warrant on the Warrant Register as the owner
in fact therefor for all purposes, except that if the Warrant is properly
transferred or assigned and notice of such transfer or assignment is given to
the Company, the Company shall treat the transferee or assignee as the owner
thereof for all purposes (or, if such transfer or assignment is properly made
in blank, the Company shall treat the bearer of this Warrant as the owner
thereof for all purposes). Should the Holder enter into a written agreement to
sell this Warrant to any Person, the Company shall have a right of first
refusal to purchase this Warrant from the Holder upon the same terms and
conditions set forth in such agreement. Such right to first refusal must be
exercised (by written notice to the Holder), and the purchase of this Warrant
must be consummated, if at all, within 45 days of receiving notice of the
Holder entering into such agreement. If such 45 day period expires without the
exercise of such right and the purchase of this Warrant by the Company, the
Holder shall be free to sell this Warrant to such Person without any liability
whatsoever to the Company. Upon exercise of such right of first refusal or the
expiration of such 45 day period without the Company exercising such right of
first refusal, the Warrant shall be transferred by the Company upon delivery
thereof duly endorsed by the Holder or by his duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced if requested by the Company in its reasonable
discretion. The Company shall immediately register all assignments and
transfers in the Warrant Register, and, upon any registration of assignment or
transfer, the Company shall deliver a new Warrant or Warrants to the person or
entity entitled thereto on the terms and conditions set forth herein (including
all changes and adjustments that have occurred hereunder). A Warrant, if
properly transferred or assigned, may be exercised by a subsequent Holder
without having a new Warrant issued. The Warrants may be exchanged at the
option of the Holder thereof for another
2
<PAGE> 3
Warrant, or other Warrants, of different denominations and representing in the
aggregate the right to purchase the same number of Shares of Common Stock on
the terms and conditions set forth herein (including all changes and
adjustments that have occurred hereunder) upon surrender to the Company or its
duly authorized agent. All provisions of this Section 3 shall be subject to
Section 13.
4. RESERVED STOCK. The Company shall reserve and keep available
at all times solely for the purpose of providing for the exercise of this
Warrant the maximum number of Shares of Common Stock as to which this Warrant
may then be exercised. All such Shares shall be duly authorized and free of
preemptive rights and, when issued upon such exercise, shall be validly issued
and fully paid and non-assessable with no liability on the part of the holders
thereof.
5. CERTAIN ADJUSTMENTS.
(a) Number of Shares; Exercise Price. The number of
Shares of Common Stock which the Holder of this Warrant shall be
entitled to receive upon each exercise hereof shall be determined by
multiplying the number of Shares of Common Stock which would otherwise
(but for the provisions of this Section 5) be issuable upon such
exercise, as designated by the Holder hereof, by a fraction of which
(i) the numerator is $.58594 and (ii) the denominator is the Exercise
Price in effect on the date of such exercise. The Exercise Price shall
be adjusted and readjusted from time to time as provided in this
Section 5 and, as so adjusted or readjusted, shall remain in effect
until a further adjustment or readjustment thereof is required by this
Section 5.
(b) Issuance of Additional Shares of Common Stock or
Certain Convertible Securities. If the Company shall issue any Common
Stock other than Excluded Stock (as hereinafter defined) without
consideration or for a consideration per share less than the fair
market value price per share of Common Stock (as determined by the
Board of Directors of the Company) in effect immediately prior to such
issuance, the Exercise Price in effect immediately prior to each such
issuance shall immediately (except as otherwise expressly provided
below) be reduced to the price of such issuance by the quotient
determined by dividing (1) the sum of (x) the product of the total
number of shares of Common Stock outstanding immediately prior to such
issuance multiplied by the fair market value per share of Common Stock
(as determined by the Board of Directors of the Company) in effect
immediately prior to such issuance multiplied by the fair market value
per share of Common Stock (as determined by the Board of Directors of
the Company) in effect immediately prior to such issuance, and (y) the
product of the total number of shares of Common Stock issued pursuant
to such issuance multiplied by the consideration per share of Common
Stock received under such issuance by (2) the number of shares of
Common Stock outstanding immediately after such issuance multiplied by
the fair market value price per share of Common Stock (as determined
by the Board of Directors of the Company) in effect immediately prior
to such issuance.
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For the purpose of any adjustment of the Exercise Price pursuant to
this Section 5(b), the following provisions shall be applicable:
(A) Cash. In the case of issuance of Common Stock for
cash, the amount of the consideration received by the Company shall be
deemed to be the amount of the cash proceeds received by the Company
for such Common Stock after deducting therefrom any discounts,
commissions, taxes or other expenses allowed, paid or incurred by the
Company for any underwriting or otherwise in connection with the
issuance and sale thereof.
(B) Consideration Other Than Cash. In the case of the
issuance of Common Stock (otherwise than upon the conversion of shares
of capital stock or other securities of the Company) for a
consideration in whole or in part other than cash, including
securities acquired in exchange therefor (other than securities of the
Company that by their terms are exchangeable for such Common Stock),
the consideration other than cash shall be deemed to be in the fair
value therefor as determined in good faith by the Board of Directors
of the Company and irrespective of any accounting treatment; provided,
that such fair value as determined by the Board of Directors shall not
exceed the aggregate Current Market Price (as hereinafter defined) of
the shares of Common Stock being issued as of the date on which the
Board of Directors authorizes the issuance of such shares.
(C) Options and Convertible Securities. In the case of
the issuance of (i) options, warrants or other rights to purchase or
acquire Common Stock (whether or not at the time exercisable), (ii)
securities by their terms convertible into or exchangeable for Common
Stock (whether or not at the time so convertible or exchangeable), or
(iii) options, warrants or rights to purchase such convertible or
exchangeable securities (whether or not at the time exercisable) other
than Excluded Stock:
(1) the aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options,
warrants or other rights to purchase or acquire Common Stock
shall be deemed to have been issued at the time such options,
warrants or rights were issued and for a consideration equal
to the consideration (determined in the manner provided in
subclauses (A) and (B) above), if any, received by the Company
upon the issuance of such options, warrants or rights plus the
minimum purchase price provided in such options, warrants or
rights for the Common Stock covered thereby;
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(2) the aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for
any such convertible or exchangeable securities, or upon the
exercise of options, warrants or other rights to purchase or
acquire such convertible or exchangeable securities and the
subsequent conversion or exchange thereof, shall be deemed to
have been issued at the time such securities were issued or
such options, warrants, or rights were issued and for a
consideration equal to the consideration, if any, received by
the Company for any such securities and related options,
warrants or rights (excluding any cash received on account of
accrued interest or accrued dividends), plus the additional
consideration (determined in the manner provided in subclauses
(A) and (B) above), if any, to be received by the Company upon
the conversion or exchange of such securities, or upon the
exercise of any related options, warrants or rights to
purchase or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange thereof;
(3) on any change in the number of shares of
Common Stock deliverable upon exercise of any such options,
warrants or rights or conversion or exchange of such
convertible or exchangeable securities or any change in the
consideration to be received by the Company upon such
exercise, conversion or exchange, including, but not limited
to, a change resulting from the anti-dilution provisions
thereof, the Exercise Price as then in effect shall forthwith
be readjusted to such Exercise Price as would have been
obtained had an adjustment been made upon the issuance of such
options, warrants or rights not exercised prior to such
change, or of such convertible or exchangeable securities not
converted or exchanged prior to such change, upon the basis of
such change;
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(4) on the expiration or cancellation of any such
options, warrants or rights or the termination of the right to
convert or exchange such convertible or exchangeable
securities, if the Exercise Price shall have been adjusted
upon the issuance thereof, the Exercise Price shall forthwith
be readjusted to such Exercise Price as would have been
obtained had an adjustment been made upon the issuance of such
options, warrants, rights or such convertible or exchangeable
securities on the basis of the issuance of only the number of
shares of Common Stock actually issued upon the exercise of
such options, warrants or rights, or upon the conversion or
exchange of such convertible or exchangeable securities; and
(5) if the Exercise Price shall have been
adjusted upon the issuance of any such options, warrants,
rights or convertible or exchangeable securities, no further
adjustment of the Exercise Price shall be made for the actual
issuance of Common Stock upon the exercise, conversion or
exchange thereof.
(D) Excluded Stock. "Excluded Stock" shall mean (1) up to
200,000 shares of Common Stock to be issued from time to time to
directors, officers, employees, consultants, advisors, independent
contractors and agents of the Company pursuant to stock options,
employee benefit plans or otherwise together with any such shares that
are repurchased by the Company and reissued to any such recipient, (2)
shares of Common Stock to be issued from time to time pursuant to
stock options granted by the Company prior to May 26, 1993, (3) up to
25,985 shares of Common Stock to be issued to A. Stephen Trevino, and
(4) up to 550,000 shares of Common Stock which may be issued to Alex
Trevino, Jr. pursuant to that certain employment agreement entered
into between the Company and Alex Trevino, Jr. dated as of May 17,
1993, (5) up to 500,000 shares of Common Stock to be issued from time
to time pursuant to the 1996 Stock Option Plan of the Company, (6) up
to 1,000,000 shares of Common Stock to be issued pursuant to warrants
issued by the Company to St. James Capital Partners, L.P., a Delaware
limited partnership ("St. James"), or its assigns, and (7) shares of
Common Stock to be issued to St. James, or its assigns, pursuant to
private placement purchases by St. James of either Common Stock or
debt instruments of the Company which are convertible into Common
Stock, in an aggregate amount not to exceed $5,000,000. All shares of
Excluded Stock that the Company has reserved for issuance shall be
deemed to be outstanding for all purposes of computations under this
Section 5(b).
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(c) Stock Dividends, Subdivisions, Reclassifications or
Combinations. If the Company shall(i) declare a dividend or make a
distribution on its Common Stock in shares of its Common Stock, (ii)
subdivide or reclassify the outstanding shares of Common Stock into a
greater number of shares, or (iii) combine or reclassify the
outstanding Common Stock into a smaller number of shares, the Exercise
Price in effect at the time of the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder
of this Warrant who exercises this Warrant after such date shall be
entitled to receive the number of shares of Common Stock which he
would have owned or been entitled to receive had this Warrant been
exercised immediately prior to such date. Successive adjustments in
the Exercise Price shall be made whenever any event specified above
shall occur.
(d) Other Distributions. In case the Company shall fix a
record date for the making of a distribution to all holders of shares
of its Common Stock (i) of shares of any class other than its Common
Stock or (ii) of evidence of indebtedness of the Company or any
subsidiary or (iii) of assets (excluding cash dividends or
distributions, and dividends or distributions referred to in Section
5(c) above) or (iv) of rights or warrants (excluding those referred to
in Section 5(b)), in each case the Exercise Price in effect
immediately prior thereto shall be multiplied by the fraction
determined by dividing (A) an amount equal to the difference resulting
from (x) fair market value price per share of Common Stock on such
record date, less (y) the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive) of said
shares or evidences of indebtedness or assets or rights or warrants to
be so distributed divided by the number of shares of Common Stock
outstanding on such record date, by (B) the fair market value price
per share of Common Stock on such record date. Such adjustment shall
be made successively whenever such a record date is fixed. In the
event that such distribution is not so made, the Exercise Price then
in effect shall be readjusted, effective as of the date when the Board
of Directors determines not to distribute such shares, evidence of
indebtedness, assets, rights or warrants, as the case may be, to the
Exercise Price which would then be in effect if such record date had
not been fixed.
(e) Other Dilutive Events. in case any event shall occur
as to which the provisions of this Section 5 are not strictly
applicable but the failure to make any adjustment relating thereto
would not fairly protect the purchase rights represented by this
Warrant in accordance with the essential intent and principles of this
Section 5, then, in each such case, the Company shall immediately make
all adjustments necessary to preserve, without dilution, the purchase
rights represented by this Warrant on a basis consistent with the
intent and principles established in this Section 5 and shall also
immediately appoint a firm of independent certified public accountants
of recognized national standing (which may be the regular auditors of
the Company if they satisfy such standard), which shall give their
opinion that such adjustment, if any, preserves, without dilution, the
purchase rights represented by this Warrant on a basis consistent with
the intent and principles established in this Section 5. Upon receipt
of such opinion, the
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Company will immediately deliver a copy thereof to the Holder of this
Warrant. The Company shall not, by amendment of its certificate of
incorporation or through any consolidation, merger, reorganization,
transfer of assets, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, and will at all times
in good faith assist in carrying out all of such terms and in the
taking of all such actions as may be necessary or appropriate in order
to protect the rights of the Holder of this Warrant against dilution
or other impairment. Without limiting the generality of the foregoing,
the Company (i) will not permit the par value of any shares of stock
receivable upon the exercise of this Warrant to exceed the amount
payable therefor upon such exercise, (ii) will take all such action as
may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of stock on the
exercise of the Warrants from time to time outstanding, and (iii) will
not take any action that results in any adjustment of the Exercise
Price if the total number of Shares of Common Stock issuable after
such action upon the exercise of all of the Warrants would exceed the
total number of Shares of Common Stock then authorized by the
Company's certificate of incorporation and available for the purpose
of issuance upon such exercise.
(f) Size of Adjustment; Rounding. No adjustment in the
Exercise Price shall be required unless such adjustment would require
an increase or decrease of at least one. cent ($.0l) in such price;
provided, however, that any adjustment that is thereby not required to
be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 5 shall be
made to the nearest cent or to the nearest one-hundredth of a Share,
as the case may be.
(g) Notice. Whenever there shall be an adjustment as
provided in this Section 5, the Company shall within three (3) days
cause written notice thereof to be given to the Holder, which notice
shall be accompanied by an officer's certificate setting forth the
Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation
thereof. However, the failure by the Company to satisfy its
obligations under this Section 5(g) shall not in any manner affect or
alter the rights of the Holder under this Warrant.
(h) Fractional Shares. The Company shall not be required
to issue fractions of shares of Common Stock or other capital stock of
the Company upon the exercise of Warrants. If any fraction of a share
would be issuable upon the exercise of any Warrant (or specified
portions thereof), the Company shall purchase such fraction for an
amount in cash equal to the same fraction of the fair value of such
share of Common Stock (as determined in good faith by the Board of
Directors of the Company but not less than the fair market value) on
the date of exercise of the Warrant.
(i) Current Market Price. The Current Market Price at any
date shall mean, in the event the Common Stock is publicly traded, the
average of the daily closing prices per share of Common Stock for 30
consecutive trading days ending no more than 5
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<PAGE> 9
trading days before such date (as adjusted for any stock dividend,
split, combination or reclassification that took effect during such 30
trading day period), as determined by the Board of Directors of the
Company. The closing price for each day shall be the last reported sale
price regular way or, in case no such reported sale takes place on such
day, the average of the last closing bid and asked prices regular way,
in either case on the principal national securities exchange on which
the Common Stock is listed or admitted to trading, or if not listed or
admitted to trading on any national securities exchange, the closing
sale price for such day reported by NASDAQ, if the Common Stock is
traded over-the-counter and quoted in the National Market System, or if
the Common Stock is so traded, but not so quoted, the average of the
closing reported bid and asked prices of the Common Stock as reported
by NASDAQ or any comparable system or, if the Common Stock is not
listed on the NASDAQ or any comparable system, the average of the
closing bid and asked prices as furnished by two members of the
National Association of Securities Dealers, Inc. selected from time to
time by the Company for that purpose. If the Common Stock is not traded
in such manner that the quotations referred to above are available for
the period required hereunder, the Current Market Price per share of
Common Stock shall be deemed to be the fair value as determined by the
Board of Directors of the Company in good faith and irrespective of any
accounting treatment.
(j) Treasury Stock. For the purposes of this Section 5,
the sale or other disposition of any Common Stock theretofore held in
the Company's treasury shall be deemed to be an issue thereof.
(k) Valid Issuance. All shares of Common Stock which may
be issued upon the exercise of this Warrant will upon issuance by the
Company be duly and validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance
thereof, and the Company shall take no action which will cause a
contrary result (including, without limitation, any action which would
cause the Exercise Price to be less than the par value, if any, of the
Common Stock).
6. PREEMPTIVE RIGHTS. If the Company shall issue any Shares of
Common Stock, rights, options, or warrants to purchase Shares of Common Stock,
or securities of any type whatsoever that are, or may become, convertible into
Shares of Common Stock (collectively, "New Securities", which term shall
exclude any Excluded Stock), the Holder of this Warrant shall be entitled to
purchase its pro rata share of all or any part of such New Securities as
provided in this Section 6. For purposes of this Section 6, the term "pro rata
share" shall mean such share as would be necessary to permit the Holder to
maintain a percentage interest in the Company (determined on a fully diluted
basis assuming the exercise of any and all outstanding options or warrants and
the conversion of any securities convertible into Shares of Common Stock) equal
to the Holder's percentage interest in the Company immediately prior to such
issuance of New Securities (determined on a fully diluted basis). In the event
the Company proposes to undertake an issuance of New Securities, it shall give
the Holder written notice of its intention, describing the type of New
Securities and the price and terms upon which the Company proposes to issue the
same. The Holder shall have 30 days from the date of receipt
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<PAGE> 10
of any such notice to agree to purchase up to its pro rata share of such New
Securities for the price and upon the terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New
Securities to be purchased. In the event the Holder fails to exercise such
right of purchase within said 30-day period, the Company shall have 90 days
thereafter to complete the sale of the New Securities at the price and upon
terms no more favorable to the purchasers of such New Securities than those
specified in the Company's notice to the Holder. In the event the Company has
not sold the New Securities within such 90-day period, the Company shall not
thereafter issue or sell any of such New Securities without first complying
with the terms of this Section 6.
7. PUT "OPTIONS.
(a) Option Based on Purchase Offer for Assets. The Company
shall notify the Holder promptly, and in any event within five days of
receipt, of any bona fide written offer received by the Company for
the purchase of all or substantially all of the Company's assets or
its stock (each an "Offer"). Should the Company determine that an
Offer is unacceptable, the Holder shall have the option to require the
Company to purchase this Warrant and/or the Shares of Common Stock
issued pursuant hereto (or any portion thereof) at a price determined
by multiplying (i) the total consideration offered for the Company's
assets or stock, as applicable, under such Offer, multiplied by, if
such Offer is for less than all of the Company's assets or stock, as
applicable, a fraction, the numerator of which is the market value of
all of the Company's assets or stock, as applicable, as determined by
the Board of Directors of the Company, which number shall in no event
be less than the total consideration offered under the Offer, and the
denominator of which is the total consideration offered under the
Offer, by (ii) the percentage ownership of the Common Stock of the
Company represented by this Warrant and the Shares of Common Stock
issued pursuant hereto that the Holder wishes to require the Company
to purchase under this Section 7(a) (expressed as a decimal and
calculated on a fully diluted basis). The price to be paid to the
Holder shall be reduced if the Holder has elected to require the
Company to purchase any unissued Shares of Common Stock evidenced by
this Warrant by an amount equal to (iii) the Exercise Price then in
effect, multiplied by (iv) the number of unissued Shares of Common
Stock evidenced by this Warrant that the Holder has elected to require
the Company to purchase. Unless otherwise agreed to in writing by the
Holder, the required purchase price shall be payable in cash within 60
days of the Company's receipt of notice of the Holder's election to
require the Company to purchase this Warrant and/or the Shares of
Common Stock issued pursuant hereto (or any portion thereof) under
this Section 7(a). If at any time the Company has not paid the
required purchase price after the Holder has exercised its option
under this Section 7(a), the Holder, in addition to having the right
to enforce the payment of such required purchase price, shall also
have the right, if the Company shall after the receipt of such first
Offer receive a later Offer that the Holder deems more favorable than
such first Offer, to rescind its election under the first Offer and
require the Company to purchase this Warrant and/or the Shares of
Common Stock issued pursuant hereto (or any portion thereof) under the
terms of such later Offer in accordance
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with the terms and procedures set forth above. This option shall be a
continuing option, exercisable as many times as the Holder shall
choose, and shall continue and remain until the Holder has sold all
unissued Shares of Common Stock evidenced by this Warrant and all
Shares of Common Stock issued hereunder to the Company.
(b) General Option. At any time after the period
beginning on May 26, 1996, upon 90 days prior written notice to the
Company (such notice being herein referred to as the "Put Notice"),
provided the Company's stock is no longer publicly traded, the Holder
shall have the option to require the Company to purchase this Warrant
and/or the Shares of Common Stock issued pursuant hereto (or any
portion thereof) for a price equal to the product of (i) the
percentage ownership of the Common Stock of the Company represented
by this Warrant and the Shares of Common Stock issued pursuant hereto
that the Holder wishes to require the Company to purchase under this
Section 7(b) (expressed as a decimal and calculated on a fully diluted
basis), and (ii) the greater of the following values, all calculated
as of the last day of the month immediately preceding the date the Put
Notice is delivered to the Company (a) 150% of the net book value of
the Company, (b) 400% of the earnings before interest, taxes,
depreciation and amortization (less any outstanding funded debt to The
Catalyst Fund, Ltd. and other lenders) ("EBITDA") of the Company for
the preceding 24 month period ended on the last day of the month
immediately preceding the date the Put Notice is delivered to the
Company, or (C) at the, option of the Holder, the appraised value of
the Company. The appraised value of the Company shall be determined
as of the last day of the month immediately preceding the date the Put
Notice is delivered to the Company in the following manner: First, the
Holder shall select and pay for an appraisal of the Company performed
by a certified appraiser (the "First Appraisal"). The appraised value
of the Company as determined by the First Appraisal shall be binding
upon the Company and the Holder as the appraised value of the Company
unless the Company shall notify the Holder in writing of its objection
to such appraised value within 30 days of the Company's receipt of
notice of such appraised value (the "First Appraisal Notice"). If the
Company so notifies the Holder, the appraisal value of the Company
determined by the First Appraisal shall nevertheless remain the
appraised value of the Company unless the Company shall pay for and
obtain a second appraisal value of the Company from a certified
appraiser (the "Second Appraisal") and deliver such Second Appraisal
to the Holder within 30 days of receipt of the First Appraisal Notice.
If the Company complies with the requirements of the preceding
sentence, the Second Appraisal shall be binding upon the Company and
the Holder as the appraised value of the Company unless the Holder
shall notify the Company of its objection to such Second Appraisal
within 30 days of the Holder's receipt of the Second Appraisal. If the
Holder so notifies the Company, the Company and the Holder shall
appoint a third certified appraiser to determine the value of the
Company, and if the Company and the Holder cannot reach an agreement
as to such third certified appraiser, the Company and the Holder shall
appoint a third party to appoint a third certified appraiser, which
determination of appraiser shall be binding upon the Company and the
Holder. The appraisal determined by such third appraiser (the "Third
Appraisal") shall be binding upon the Company and the Holder and shall
be the appraised
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value of the Company. The Company and the Holder shall bear equally
all costs of such Third Appraisal. The price to be paid to the Holder
shall be reduced if the Holder has elected to require the Company to
purchase any unissued Shares of Common Stock evidenced by this Warrant
by an amount equal to (iii) the Exercise Price then in effect,
multiplied by (iv) the number of unissued Shares of Common Stock
evidenced by this Warrant that the Holder has elected to require the
Company to purchase. Unless otherwise agreed to in writing by the
Holder, the required purchase price shall be payable in cash within 75
days of the Company's receipt of notice of the Holder's election to
require the Company to purchase unissued Shares of Common Stock
evidenced by this Warrant and/or Shares of Common Stock issued
pursuant hereto (or any portion thereof) under this Section 7(b). This
option shall be a continuing option, exercisable as many times as the
Holder shall choose, and shall continue and remain until the Holder
has sold all unissued Shares of Common Stock evidenced by this Warrant
and all Shares of Common Stock issued hereunder to the Company.
(c) Purchase by Third Party. At the option of the Board
of Directors of the Company, the Company may allow all, or any portion
greater than 25 percent, of the Warrant or any Common Stock required
to be purchased by the Company pursuant to Section 7(a) or 7(b) above,
to be purchased directly by any of the Company's shareholders,
provided, however, that should any of the Company's shareholders fail
to make payment of the required purchase price on the designated
purchase date, the Company shall be required to purchase such portion
of this Warrant or such Common Stock intended to be purchased by such
shareholders of the Company.
8. CERTAIN CORPORATE EVENTS OR ACTIONS.
(a) Consolidation, Merger, Etc. In case of any
consolidation with or merger of the Company with or into another
corporation or other entity (except for a merger or consolidation in
which the Company is the continuing corporation other than as a
subsidiary of another corporation or other entity), or in case of any
sale, lease or conveyance to another corporation or other entity of
the property of the Company as an entirety or substantially as an
entirety, such successor, purchasing, leasing or receiving corporation
or other entity, as the case may be, shall, prior to and as a
condition to the occurrence of such event, (i) execute with the Holder
an agreement providing that the Holder shall have the right thereafter
to receive upon exercise of this Warrant the kind and amount of shares
of stock and other securities, property, cash or any combination
thereof receivable upon such consolidation, merger, sale, lease or
conveyance by a holder of the number of Shares of Common Stock for
which this Warrant might have been exercised immediately prior to such
consolidation, merger, sale, lease or conveyance and (ii) make
effective provision in its certificate of incorporation or otherwise,
if needed, in order to effect such agreement. Such agreement shall
provide for adjustments which shall be equivalent to the adjustments
in Section 5.
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(b) Reclassification, Etc. In case of any
reclassification or change of the Shares of Common Stock issuable upon
exercise of this Warrant or in case of any consolidation or merger or
another corporation or other entity with or into the Company in which
the Company is the continuing corporation (other than as a subsidiary
of another corporation or other entity) and in which there is a
reclassification or change (including a change to the right to receive
cash or other property) of the Shares of Common Stock, the Holder
shall have the right thereafter to receive upon exercise of this
Warrant the kind and amount of shares of stock and other securities,
property, cash or any combination thereof receivable upon such
reclassification, change, consolidation or merger by a holder of the
number of Shares of Common Stock into which this Warrant would have
been exercisable immediately prior to such reclassification, change,
consolidation or merger. Thereafter, appropriate provision (as
determined by the Board of Directors of the Company in good faith)
shall be made for adjustments which shall be equivalent to the
adjustments in Section 5.
9. CERTAIN RESTRICTIONS. Notwithstanding the adjustment
provisions contained in this Warrant, the Company shall not take any of the
following actions without first receiving the express written consent of the
Holder:
(a) Except for the issuance of up to 550,000 shares of
Common Stock which may be issued to Alex Trevino, Jr. pursuant to that
certain employment agreement entered into between the Company and Alex
Trevino, Jr. dated as of May 17, 1993, issue Common Stock (otherwise
than upon the conversion of shares of capital stock or other
securities of the Company) for a consideration in whole or in part
other than cash, including securities acquired in exchange therefor
(other than securities of the Company that by their terms are
exchangeable for such Common Stock).
(b) Make a distribution to all holders of shares of its
Common Stock of (i) shares of any class other than its Common Stock,
(ii) evidence of indebtedness of the Company or any subsidiary, or
(iii) assets (excluding cash dividends or distributions, and dividends
or distributions referred to in Section 5(c)), or (iv) of rights or
warrants (excluding those referred to in Section 5(b)).
(c) Enter into any consolidation with or merger with or
into another corporation or other entity (except for a merger or
consolidation in which the Company is the continuing corporation other
than as a subsidiary of another corporation or other entity), or enter
into any sale, lease or conveyance to another corporation or other
entity of the property of the Company as an entirety or substantially
as an entirety.
10. EXTENSION OF EXPIRATION DATE. If the last scheduled payment
date for the repayment of outstanding indebtedness under any of those certain
promissory notes (the "Notes"), each dated May 26, 1993 executed by ACR Supply,
Inc., a Texas corporation, Fabricated Systems, Inc., a Texas corporation, and
Heating and Cooling Supply, Inc., a Nevada corporation, and payable to the order
of The Catalyst Fund, Ltd., a Texas limited partnership,
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in the aggregate original principal amount of $1,000,000 shall be extended
beyond May 26, 1999, then the expiration date of this Warrant shall also be
likewise extended to the date that is equal to the latest of the last scheduled
payment dates under any of the Notes. Additionally, if the Holder has exercised
any put option under Section 7 of this Agreement and (a) the Company is
financially unable, or in any event fails, to timely pay all of the required
purchase price under Section 7, or (b) or any creditor of the Company has
indicated to the Holder or the Company that the payment of such required
purchase price would be a default under the Company's indebtedness to such
creditor, then the expiration date of this Warrant shall be extended to the
date that is three and one-half years beyond the then expiration date of this
Warrant for any portion of this Warrant not purchased by the Company (including
any portion of this Warrant that the Holder has not required the Company to
purchase under Section 7), and the Holder shall be deemed to have retracted its
exercise of such put option; provided, however, that such retraction shall be
without prejudice to the Holder, and the Holder shall be entitled, at any time
thereafter prior to the expiration of this Warrant, to re-exercise such put
option upon the same terms of the prior exercise thereof upon the terms and
conditions set forth in Section 7.
11. CERTAIN NOTICES. In case at any time the Company shall propose or
have knowledge of any proposal:
(a) to pay any dividend or make any distribution on
Shares of Common Stock or to fix a record date for the making of any
such dividend or distribution to holders of Common Stock; or
(b) to take, or fix a record date for, any action that would
result in any adjustment to the Exercise Price pursuant to Section 5;
or
(c) to effect any reclassification or change of
outstanding Shares of Common Stock, or consolidation or merger, or
sale, lease or conveyance of property, of the type addressed in
Section 8; or
(d) to effect any voluntary or involuntary liquidation,
dissolution or winding-up of the Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof to the Holder at least 30 days prior to the date on which (i)
the books of the Company shall close, or a record date shall be set, for any
such action described in Section 11 (a) or (b) or (ii) such reclassification,
change, consolidation, merger, sale, lease, conveyance, liquidation,
dissolution or winding-up shall be effective, as the case may be.
12. EXPENSES. The Company shall pay all costs, fees, taxes (other
than stock transfer taxes) and expenses payable in connection with the
preparation, issuance and delivery from time to time of Warrants and of Shares
of Common Stock issued upon the exercise of Warrants.
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<PAGE> 15
13. RESTRICTIONS ON TRANSFER. This Warrant and the Shares of
Common Stock or other securities issued upon exercise of this Warrant shall be
subject to a stop-transfer order (except with respect to a transfer by the
original Holder of this Warrant to its partners) and the certificate or
certificates evidencing any such Shares or securities shall bear the following
legend, unless in the opinion of counsel to the Holder exercising any Warrant
such legend is not required in order to comply with the Securities Act of 1933,
as amended (the "Securities Act"), which opinion shall be reasonably
satisfactory to the Company, or unless the offering and sale of the Shares or
other securities issued upon exercise of the Warrants have been registered
under the Securities Act, and in each such case such restriction on transfer
and legend shall be removed:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION.
SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT UPON
SUCH REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE CORPORATION STATING THAT SUCH SALE, ASSIGNMENT
OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER SUCH ACT AND LAWS."
14. REGISTRATION OF COMMON STOCK; LISTING. If any Shares of Common
Stock required to be reserved for purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal
or state law before such Shares may be issued upon exercise, the Company will,
at its expense and as expeditiously as possible, cause such Shares to be duly
registered or approved, as the case may be. At any such time as Common Stock is
listed for trading, the Company will, at its expense, obtain promptly and
maintain the approval of all securities exchanges (including, for this purpose,
NASDAQ and the NASDAQ National Market System) on which the Common Stock is
listed for trading for an additional listing, upon official notice of issuance,
of the Shares of Common Stock issuable upon exercise of the then outstanding
Warrants and maintain the listing of such shares after their issuance.
15. AVAILABILITY OF INFORMATION. (a) If the Company shall have
filed a registration statement pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or a registration
statement pursuant to the Securities Act, the Company will comply with the
reporting requirements of Section 13 and 15(d) of the Exchange Act (or, if the
Company is not required to so comply and it shall have so filed such a
registration statement, it will make publicly available the information
specified by Rule 144(c)(2) under the Securities Act) and will comply with all
other public information reporting requirements of the Securities and Exchange
Commission (the "Commission") (including Rule 144 promulgated by the Commission
under the Securities Act) from time to time in effect and relating to the
availability of an exemption from the Securities Act for the sale of any
restricted securities (as defined in the Securities Act) or the sale of
securities by affiliates (as defined in the Securities Act). The Company will
also cooperate with each holder of any restricted securities in supplying such
15
<PAGE> 16
information as may be necessary for such holder to complete and file any
information reporting forms presently or hereafter required by the Commission
as a condition to the availability of an exemption from the Securities Act for
the sale of any restricted securities or the sale of securities by affiliates.
The Company will furnish to each Holder of a Warrant, promptly upon their
becoming available, copies of all financial statements, reports, notices and
proxy statements sent or made available generally by the Company to its
stockholders, and copies of all regular and periodic reports and all
registration statements and prospectuses filed by the Company with any
securities exchange or with the Commission. The Company will also furnish each
Holder with copies of all minutes of all meetings of the Company's Board of
Directors or any committee thereof, forthwith after such minutes have been
prepared.
(b) The Holder agrees to accept and maintain on a confidential
basis as Provided in this Section 15(b), all information obtained by it
pursuant to Section 15(a) or otherwise under this Agreement (such information
is referred to for purposes of this Section 15(b) as "Information"). The Holder
agrees that unless it receives the express written permission of the Company or
is otherwise required to make disclosure by law, a regulation of a national
stock exchange or any other industry self-regulating body (referred to
collectively for purposes in this Section 15(b) as "Law"), the Holder will not
disclose, publish or reveal any of the Information except to those of its
employees, agents or representatives as have a need to know and who have agreed
to maintain the confidentiality of the Information. Except as may be required
by Law, the Holder will not disclose any of the Information to third parties.
The Holder agrees, and it will advise all employees, agents and representatives
who have access to the Information, that the United States securities laws may
prohibit any Person who has received material, non-public information with
respect to an issuer from purchasing or selling securities of such issuer or
from communicating such information to any other Person. The responsibility of
the Holder with respect to Information received from Company and/or its
subsidiaries shall terminate as to such of the Information as becomes public
knowledge by publication or general knowledge in the trade through no fault of
the Holder, its employees, agents or representatives. Notwithstanding anything
to the contrary in this Section 15(b), the Holder may, (i) with respect to any
prospective purchaser of the Warrant (or any portion thereof) that is not a
direct competitor of the Company or any of its subsidiaries (each such
prospective purchaser being hereinafter referred to as a "Company Competitor"),
after written notice to the Company on or before the 10th day prior to
disclosure, disclose Information to any such prospective purchaser; provided,
however, that the Holder may immediately disclose Information to any such
Person upon the occurrence and continuance of any Event of Default (as such
term is defined in that certain Note Agreement of even date herewith to which
the Company and the Holder are parties (among other parties) (the "Note
Agreement"); (ii) with respect to any prospective purchaser of the Warrant (or
any portion thereof) that is a Company Competitor, upon the occurrence and
continuance of any Event of Default (as such term is defined in the Note
Agreement), disclose Information to any such prospective purchaser; (iii)
disclose Information to the Holder's legal counsel or auditors, so long as such
disclosures are held in confidence by the recipients thereof; and (iv) so long
as The Catalyst Fund, Ltd. is a Person constituting the Holder, disclose
information to any Person who is an equity investor in The Catalyst Fund, Ltd.
16
<PAGE> 17
16. LOSS, THEFT, ETC. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of any Warrant and upon
surrender and cancellation of any Warrant if mutilated, the Company shall
execute and deliver to the Holder thereof a new Warrant in the form and
substance of the lost, stolen, destroyed or mutilated Warrant (including all
changes and adjustments that have occurred hereunder).
17. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. Nothing contained
in this Warrant shall be construed as conferring upon the Holder hereof any
rights as a stockholder of the Company or as imposing any obligation upon such
Holder to purchase any securities or as imposing any liability upon such Holder
as a stockholder of the Company, whether such obligation or liability is
asserted by the Company or by creditors of the Company at law or in equity.
18. GOVERNING LAW. This Warrant shall be governed by and construed
in accordance with the internal laws of the State of Texas.
19. REMEDIES. The Company stipulates that the remedies at law of
the Holder of this Warrant in the event of any default or threatened default by
the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that, to the extent permitted by
applicable law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any terms hereof or otherwise; provided, however, that
(i) the Company shall not seek specific enforcement of its rights under this
Warrant unless the Holder is acting in contravention of its obligations or
outside of its rights under this Warrant and (ii) the Company hereby agrees to
indemnify and hold harmless the Holder from any costs, liabilities, losses or
expenses incurred by the Holder caused by or otherwise associated with a claim
by the Company for specific enforcement of its rights under this Warrant if
such claim is not a claim permitted to be made pursuant to clause (i)
immediately preceding.
20. NOTICES. All notices and other communications provided for
herein shall be delivered or mailed by registered or certified mail, return
receipt requested, postage prepaid, addressed (a) if to any Holder of any
Warrant, to the address of such Holder as set forth in the Warrant Register or
to such other address as such Holder has notified the Company of in writing, or
(b) if to the Company, to the address set forth in Section 1 or to such other
address as the Company has notified such Holder of pursuant to Section I and
this Section 20; provided, however, that the exercise of any Warrant shall be
effective in the manner provided in Section 1. All notices given pursuant to
this Warrant shall be deemed to be effective upon receipt thereof by the party
to whom such notice is addressed.
21. REPRESENTATIONS AND WARRANTIES. In order to induce the
acquisition of this Warrant by the Holder, the Company hereby represents and
warrants to the Holder that the representations and warranties of the Company
contained in the Note Agreement are true and correct in all respects as of the
date hereof (with all references in such representations and warranties to the
"Note" or "Notes" meaning this Warrant and all references in such
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<PAGE> 18
representations and warranties to the "Subject Documents" meaning this Warrant
and the Registration Rights Agreement of even date herewith between the Company
and the Holder. The Holder hereby represents and warrants to the Company that
it has not purchased or sold any securities of the Company within the 60-day
period preceding the date hereof.
22. MISCELLANEOUS. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. Any provision of this Warrant that shall be
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the Company waives any provision of law that shall render
any provision hereof prohibited or unenforceable in any respect. The section
and paragraph headings used in this Warrant are inserted for convenience only
and shall not be used for any interpretive purpose.
THIS WARRANT IS ISSUED IN SUBSTITUTION FOR AND REPLACEMENT OF THAT
CERTAIN WARRANT NO. 3 ISSUED BY THE COMPANY TO THE HOLDER DATED OCTOBER 6,
1996, SUCH WARRANT NO. 3 BEING HEREBY DEEMED CANCELLED.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and attested by its Secretary.
Dated: April 14, 1997 ACR GROUP, INC.
By: /s/ ALEX TREVINO, JR.
----------------------------
Alex Trevino, Jr., President
Attest:
/s/ANTHONY R. MARESCA
- -------------------------------
Anthony R. Maresca, Secretary
18
<PAGE> 19
EXHIBIT A TO WARRANT
To: ACR Group, Inc.
3200 Wilcrest, #440
Houston, Texas 77042
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to subscribe for ___
Shares of Common Stock covered by the within Warrant and tenders payment
herewith in the amount of $_________ in accordance with the terms thereof, and
requests that certificates for such shares in the following denominations be
issued in the name of, and delivered to, the person[s] at the following
address[es]:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print Address[es] and Social Security Number[s] or
Employer Identification Number[s] as applicable)
and, if said number of shares shall not be all the shares covered by the within
Warrant, that a new Warrant for the balance remaining of the shares covered by
the within Warrant be registered in the name of, and delivered to, the
undersigned at the address stated below:
Date: Name:
----------- ----------------------------
(Print)
---------------------------------
(Signature)
Address:
------------------
------------------
------------------
<PAGE> 1
EXHIBIT 10.15
AGREEMENT OF PURCHASE AND SALE
This Agreement of Purchase and Sale (the "Agreement"), is made and
entered into as of January 24, 1997, by and between ACR Group, Inc., a Texas
corporation (the "Seller"), and St. James Capital Partners, L.P., a Delaware
limited partnership (the "Purchaser"), and sets forth the terms and conditions
of the sale and purchase of a $1,400,000 10% Convertible Promissory Note,
substantially in the form attached hereto as Exhibit A (the "Note"). For
purposes of this Agreement, the term "Seller" is defined to mean ACR Group,
Inc. and each of its subsidiaries.
WHEREAS, the Seller desires to issue and sell to the Purchaser, and
the Purchaser desires to purchase and accept from the Seller, the Note in the
form of Exhibit A, on the terms and subject to the conditions set forth herein,
the obligations of which of the Seller are secured by the Borrower Security
Agreement, the Subsidiary Security Agreement, the Subsidiary Guaranty and the
Collateral Agreement, each dated as of the date hereof and attached as Exhibits
B, C, D and E, respectively (the "Security Documents").
WHEREAS, the Seller and the Purchaser desire to make certain
representations, warranties and agreements in connection with the purchase and
sale of the Note contemplated hereby.
WHEREAS, the Seller desires to sell to the Purchaser warrants (the
"Warrants"), to purchase shares of Seller's common stock, par value $.01 per
share (the "Common Stock"), which Warrants shall have the terms and be subject
to the conditions set forth in the Form of Warrants attached hereto as Exhibit
F (the "Warrants").
WHEREAS, the Seller desires to grant to the Purchaser certain
registration rights in respect to the shares of Seller's Common Stock that may
be acquired on the conversion of the Note or the exercise of the Warrants,
which registration rights shall have the terms and be subject to the conditions
set forth in the Registration Rights Agreement attached hereto as Exhibit G
(the "Registration Rights Agreement"; this Agreement, the Note, the Security
Documents, the Warrants and the Registration Rights Agreement are collectively
referred to as the "Transaction Documents").
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein, the parties agree as
follows:
ARTICLE I
PURCHASE AND SALE
1.1 Purchase and Sale of the Note and the Warrants. Subject to
the terms of this Agreement, the Seller agrees to and does hereby issue, sell
and deliver the Note and the Warrants to the Purchaser at the Closing (as
defined herein), and Purchaser agrees to and does hereby purchase and accept
the Note and the Warrants from the Seller.
1.2 Consideration for Purchase of the Note. Subject to the terms
of this Agreement, the Purchaser hereby agrees to pay to the Seller at Closing,
by check or wire transfer to the account of the Seller, $1,400,000, as the
consideration for the purchase of the Note (the "Note Consideration").
1.3 Consideration for Purchase of the Warrants. Subject to the
terms of this Agreement, the
<PAGE> 2
Purchaser hereby agrees to pay to the Seller at Closing, by check or wire
transfer to the account of the Seller, $280.00, or $0.001 per Warrant, as the
consideration for the purchase of the Warrants (the "Warrants Consideration";
the Note Consideration and the Warrants Consideration are collectively referred
to as the "Consideration").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to the Purchaser as follows:
2.1 Organization, Standing, and Qualification. Seller is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Texas and has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as it is
now being conducted. Seller is licensed and qualified to do business as a
foreign corporation in each jurisdiction in which the character of Seller's
properties, owned or leased, or the nature of its activities makes such
qualification or license necessary, except where failure to be so licensed and
qualified would not have a material adverse effect on Seller's business.
2.2 Authority; No Defaults. Seller has all requisite corporate
power and authority to enter into the Transaction Documents and to consummate
the transactions contemplated thereby. The execution and delivery of the
Transaction Documents and the consummation of the transactions contemplated
thereby have been duly authorized by all necessary corporate action on the part
of Seller. The Transaction Documents have been executed and delivered by
Seller and constitute the valid and binding obligation of Seller, enforceable
in accordance with their terms, subject to bankruptcy, insolvency, moratorium
and other similar laws affecting creditors' rights generally and general
principles of equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law). The execution and delivery of the
Transaction Documents do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with or result in a breach
of or the acceleration of any obligation under, or constitute a default or
event of default (or event which, with notice or lapse of time or both, would
constitute a default) under, any provision of any charter, bylaw, indenture,
mortgage, lien, lease, agreement, contract, instrument, order, judgment,
decree, ordinance or regulation, or any restriction to which any property of
Seller is subject or by which Seller is bound, the effect of which would be
materially adverse to Seller. Seller is not, nor is it alleged to be, in
material violation or default of any applicable law, statute, order, rule or
regulation promulgated or judgment entered by any court, administrative agency
or commission or other governmental agency or instrumentality, domestic or
foreign (a "Governmental Entity"), relating to or affecting the operation,
conduct or ownership of the property or business of Seller.
2.3 Approvals. There is no legal impediment to the execution and
delivery of the Transaction Documents by Seller or to the consummation of the
transactions contemplated thereby, and no filing or registration with, or
authorization, consent or approval of, a Governmental Entity, shareholders or
any other third party is necessary for the consummation by Seller of the
transactions contemplated thereby.
2.4 SEC Documents. Seller has made all filings with the
Securities and Exchange Commission ("SEC") that it has been required to make
under the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act") since February
28, 1995. Seller has provided to the Purchaser a true, complete and correct
copy of Seller's
2
<PAGE> 3
annual report on Form 10-K for the fiscal year ended February 29, 1996 together
with all amendments thereto, and any and all filings with the SEC made by
Seller (including all requested exhibits to such filings) since the filing of
said Form 10-K (all such documents that have been filed with the SEC, as
amended, are referred to as the "Seller SEC Documents"). As of their
respective dates, and except as amended, the Seller SEC Documents complied in
all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and none of the Seller SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Seller included in the Seller SEC
Documents comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of
the unaudited statements, as permitted by Form 10-Q) and fairly present
(subject, in the case of the unaudited statements, to normal recurring audit
adjustments) the consolidated financial position of Seller as of the dates
thereof and the consolidated results of its operations and cash flows for the
periods then ended. Except as set forth in the Seller SEC Documents, since
November 30, 1996, (i) there have been no material adverse changes in the
Seller's business, operations or financial condition and (ii) Seller's
operations have been conducted in the ordinary course of business except as
disclosed in writing to the Purchaser.
2.5 Litigation. Except as set forth in Seller SEC Documents, as
of the date of this Agreement, there is no suit, action, proceeding or
investigation pending or, to the best knowledge of Seller, threatened against
or affecting Seller (or any of its respective officers or directors in
connection with the business of Seller), nor is there any outstanding judgment,
order, writ, injunction or decree against Seller, which judgment would have a
material adverse effect on Seller. Seller is not subject to any court order,
writ, injunction, decree, settlement agreement or judgment that contains or
orders any on-going obligations, whether prohibitory or mandatory in nature,
the performance of which would have a material adverse effect on Seller.
2.6 Capitalization. Seller has authorized capital stock of (a)
25,000,000 shares of Common Stock of which there are 10,371,555 shares issued
and outstanding, and (b) 2,000,000 shares of preferred stock, par value $.0l
per share, ("Preferred Stock"), of which none are issued and outstanding. All
of the issued and outstanding shares of Common Stock were duly and validly
issued and are fully paid and non-assessable. None of the outstanding shares
of Common Stock have been issued in violation of any preemptive rights of the
current or past shareholders of Seller. As of the date hereof, the Seller has
reserved for issuance (i) an aggregate of 923,437 shares of Common Stock
issuable on issuance of stock options to employees, officers and directors,
(ii) an aggregate of 1,000,000 shares of Common Stock issuable on issuance of
stock options and warrants to persons other than those described above in (i),
and (iii) no shares of Common Stock are issuable on exercise of convertible
securities other than those listed in (i) and (ii) above. Except as set forth
on Schedule 2.6, or described above in (i), (ii) and (iii), and except for
shares that may be issued in connection with completed or pending acquisitions,
there are no outstanding options, warrants or rights to subscribe for, or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of Seller or
contracts, commitments, understandings or arrangements by which Seller is or
may be obligated to issue additional shares of its capital stock or options,
warrants, or rights to purchase or acquire any additional shares of its capital
stock. All of the Common Stock issued on the conversion of the Note and the
exercise of the Warrants will be fully paid, non-assessable and free and clear
of any preemptive rights and Encumbrances. As used in this Agreement, the term
"Encumbrance" means and includes (i) any
3
<PAGE> 4
security interest, mortgage, deed of trust, lien, charge, pledge, proxy,
adverse claim, equity, power of attorney, or restriction of any kind, including
but not limited to, any restriction or servitude on the use, transfer, receipt
of income, or other exercise of any attributes of ownership, and (ii) any
Uniform Commercial Code financing statement or other public filing, notice or
record that by its terms purports to evidence or notify interested parties of
any of the matters referred to in clause (i) that has not been terminated or
released by another proper public filing, notice or record.
2.7 Subsidiaries. Schedule 2.7 sets forth a true, complete and
correct list of each subsidiary of Seller, including state or country of
organization and address of its principal executive offices. Each subsidiary
of Seller is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, has all
requisite corporate power and authority to own, to lease or to operate its
properties and to carry on its business as it is now being conducted and is
duly qualified or licensed to do business in each jurisdiction in which the
character of its properties, owned or leased, or the nature of its activities
makes such qualification or license necessary, unless the failure to be so
licensed or qualified would not have a material, adverse effect on Seller.
Except as set forth in Schedule 2.7, all outstanding shares of capital stock
of each subsidiary of Seller were duly and validly issued and are fully paid,
nonassessable and owned by Seller or a subsidiary of Seller, free and clear of
all Encumbrances. There are no options, warrants or other rights, agreements
or commitments (including preemptive rights) obligating Seller or any of its
subsidiaries to issue, to sell or to transfer any shares of capital stock or
other securities of any subsidiary of Seller.
2.8 Liabilities. Except as set forth in Schedule 2.8, Seller has
no liabilities or obligations, either accrued, absolute, contingent, or
otherwise that have a material adverse effect on the value or business of
Seller, and Seller has no knowledge of any potential liability that it
reasonably believes would likely result in a material adverse effect on the
value or business of the Seller, other than those (a) reflected or reserved
against in the unaudited consolidated balance sheet of Seller at November 30,
1996 or disclosed in other Seller SEC Documents or (b) incurred in the ordinary
course of business since November 30, 1996.
2.9 Licenses, Permits, Authorizations, Etc. Seller holds all
approvals, authorizations, consents, licenses, orders, franchises, rights,
registrations and permits of any type required to operate its business as
presently conducted. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
revocation, cancellation, suspension or modification of any such approval,
authorization, consent, license, order, franchise, right, registration or
permit.
2.10 Title to Assets; Encumbrances. Except as set forth in
Schedule 2.10:
2.10.1 Seller has good and indefeasible title to its assets,
whether real, personal or intangible, free and clear of all Encumbrances except
(i) as reflected in the Seller SEC Documents, (ii) liens for current taxes and
assessments not yet due or being contested in good faith by appropriate
proceedings, (iii) mechanic's liens arising under the operation of law for
actions contested in good faith or for which payment arrangements have been
made, (iv) liens granted or incurred by Seller in the ordinary course of its
business or financing of equipment, office space, furniture and computers in
the ordinary course of its business, and (v) easements, rights of way,
encroachments or other reductions or matters affecting title which do not
prevent the assets from being used for the purpose for which they are currently
being used;
4
<PAGE> 5
2.10.2 There are no parties in possession of any of the
assets of Seller other than personal property held by third parties in the
reasonable and ordinary course of business. Seller enjoys full, free and
exclusive use and quiet enjoyment of its assets and its rights pertaining
thereto. Seller enjoys peaceful and undisturbed possession under all leases
under which it is a lessee, and all such leases are legal, valid and binding
obligations of Seller, enforceable against Seller in accordance with its terms.
2.11 Taxes and Returns. Seller has filed all required tax returns
and reports. Seller has paid all taxes, assessments and governmental charges
and penalties which it has incurred, except such as are being or may be
contested in good faith by appropriate proceedings. Seller is not delinquent
in the payment of any tax, assessment or governmental charge. No deficiencies
for any taxes have been proposed, asserted, or assessed against Seller, and no
requests for waivers of the time to assess any such tax are pending. For the
purposes of this Agreement, the term "tax" (including, with correlative
meaning, the terms "taxes" and "taxable") shall include all federal, state,
local and foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise and other taxes, duties or
assessments of any nature whatsoever, together with all interest, penalties and
additions imposed with respect to such amounts.
2.12 Insurance. Each policy of property, fire and casualty,
product liability, worker's compensation, professional liability and title
insurance and other forms of insurance (except group, health and life policies)
and each bond issued or posted by any person with respect to any operations or
other activities of Seller is, to the knowledge of Seller, the legal, valid and
binding obligation of the insurer or bond issuer, enforceable in accordance
with its terms, and is in an amount and provides for coverage as is customary
in the ordinary business practices of Seller's industry.
2.13 Hazardous Wastes and Substances. Except as set forth in
Seller SEC Documents, neither the operations of Seller nor the use of its
assets violates any applicable federal, state or local law, statute, ordinance,
rule, regulation, memorandum of understanding, order or notice requirement
pertaining to the collection, transportation, storage, treatment, discharge,
release or disposal of hazardous or non-hazardous waste or substances,
including without limitation (i) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (42 U.S.C. Sections 9601 et seq.), as
amended from time to time on or before the Closing Date ("CERCLA") (including,
without limitation, as amended pursuant to the Superfund Amendments and
Reauthorization Act of 1986), and such regulations promulgated under CERCLA on
or before the Closing Date, (ii) the Resources Conservation and Recovery Act of
1976 (42 U.S.C. Sections 6901 et seq.), as amended from time to time ("RCRA")
on or before the Closing Date, and such regulations promulgated under RCRA,
(iii) any applicable federal, state or local laws or regulations relating to
the environment in effect on the Closing Date (collectively, the "Applicable
Environmental Laws"). Except as set forth in the Seller SEC Documents, none of
the operations of Seller has ever been conducted nor have any of its assets
been used in such a manner as to constitute a violation of any of the
Applicable Environmental Laws. Except as set forth in Seller SEC Documents, no
notice has been served on Seller by any person or Governmental Entity regarding
any existing, pending or threatened investigation or inquiry related to
violations under any Applicable Environmental Law, or regarding any claims for
corrective action, remedial obligations or contribution for removal costs or
damages under any Applicable Environmental Law or regarding the designation of
Seller or any of its affiliates as a potentially responsible party for any
facility under the Applicable Environmental Laws, nor, does any fact or
circumstance exist which, if disclosed publicly, would be reasonably likely to
result in the service on Seller of any such notice. Except as set forth on
Seller SEC Documents, there has been no action taken, or omitted to be taken by
Seller which has caused, or would be reasonably likely to cause, a "release" of
any "hazardous substance" at any "facility", without limitation, within the
meaning of such terms as
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defined in the Applicable Environmental Laws.
2.14 Use of Proceeds. Seller shall use the consideration for
purposes of funding the acquisition of all of the capital stock of Lifetime
Filter, Inc. ("Lifetime Filter") and the assets of the O'Leary Family
Partnership, Ltd. (the "O'Leary Partnership") pursuant to that certain Purchase
Agreement dated as of January 1, 1997 (the "Lifetime Agreement"), among Seller,
Lifetime Filter, Richard O'Leary, and the O'Leary Partnership.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.1 Investment Intent. The Note and the Warrants are being
acquired for Purchaser's own account and not with a view to public distribution
and Purchaser acknowledges that the purchase and sale of the Note and the
Warrants is intended to be exempt from registration under the Securities Act by
virtue of Section 4(2) of the Securities Act.
3.2 Accredited Investor. The Purchaser is an accredited investor
within the meaning of Rule 501 under the Securities Act.
3.3 Restricted Securities. The Purchaser acknowledges that the
Note and the Warrants have not been registered under the Act and therefore
cannot be sold or transferred unless either they are subsequently registered
under the Act (as well as under any applicable state securities laws) or an
exemption from such registration is available. The Note and the Warrants will
be "restricted securities" under Rule 144 promulgated under the Act, and unless
and until registered under the Act, the Note and the Warrants may be subject to
limitations on resale set forth in Rule 144 or in administrative
interpretations of the Securities Act by the SEC or in other rules and
regulations in effect at the time of the proposed sale or other disposition of
the Note or the Warrants.
ARTICLE IV
THE CLOSING
4.1 Time and Place. The closing of the purchase and sale of the
Note and the Warrants (the "Closing") will take place on a date agreed to by
the parties (the "Closing Date"), at the offices of Gardere Wynne Sewell &
Riggs, L.L.P., unless another time and place are agreed to by the parties.
4.2 Conditions to the Obligation of Seller. The obligation of
Seller to effect the Closing is subject to the Purchaser delivering, or causing
to be delivered, to Seller at the Closing the Consideration.
4.3 Conditions to the Obligation of Purchaser. The obligation of
Purchaser to effect the Closing is subject to Seller delivering, or causing to
be delivered, to Purchaser at the Closing the following:
4.3.1 evidence, to the satisfaction of Purchaser, that the
transactions contemplated in the Lifetime Agreement have been
consummated;
4.3.2 copies, certified by the Secretary of State of the
State of Texas, of the Articles
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of Incorporation of Seller and all amendments thereto;
4.3.3 copies, certified by the Secretary of Seller as of the
Closing Date, of the bylaws of Seller and all amendments thereto;
4.3.4 copies, certified by a certificate of the Secretary
of Seller as of the Closing Date, of resolutions duly adopted by the
board of directors of Seller, authorizing the execution and delivery
by Seller of the Transaction Documents and all other agreements or
other documents contemplated thereby, the completion of the sale of
the Note and Warrants and the taking of all such other corporate
action as shall have been required as a condition to, or in connection
with, the sale of the Note and Warrants;
4.3.5 the Note;
4.3.6 the Security Documents and any related financing
statements;
4.3.7 the Warrants;
4.3.8 the Registration Rights Agreement;
4.3.9 an opinion of Robert D. Remy, counsel to Seller, in
form and substance acceptable to Purchaser;
4.3.10 written consent from all third parties requiring
prior approval of the transactions contemplated by this Agreement,
including the consents of NationsBank of Texas, N.A. and The Catalyst
Fund, Ltd.; and
4.3.11 (i) the certificates evidencing all of the issued and
outstanding capital stock of Valley Supply, Inc. together with the
associated stock powers executed in blank, (ii) the certificates
evidencing all of the issued and outstanding capital stock of
Ener-Tech Industries, Inc. together with the associated stock powers
executed in blank, (iii) the certificates evidencing all of the issued
and outstanding capital stock of Florida Cooling Supply, Inc. together
with the associated stock powers executed in blank, (iv) the
certificates evidencing all of the issued and outstanding capital
stock of Time Energy Systems Southwest, Inc. together with the
associated stock powers executed in blank, and (v) the certificates
evidencing all of the issued and outstanding capital stock of Lifetime
Filter, Inc, together with the associated stock powers executed in
blank.
ARTICLE v
GENERAL PROVISIONS
5.1 Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements contained in this Agreement shall
survive the Closing until the lesser of: (i) such time as the Purchaser is no
longer the owner of any of the Shares or (ii) 4 years.
5.2 Notices. All notices or other communications which are required
or may be given under this Agreement shall be in writing and shall be deemed to
have been duly given when delivered in
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person, transmitted by telecopier (with receipt confirmed) or mailed by
registered or certified first class mail, postage prepaid, return receipt
requested to the parties hereto at the address set forth below (as the same may
be changed from time to time by notice similarly given) or the last known
business or residence address of such other person as may be designated by
either party hereto in writing.
(a) If to Seller:
ACR Group, Inc.
3200 Wilcrest Drive, Suite 440
Houston, Texas 77042
Attn: Mr. Alex Trevino, Jr., President
(b) If to Purchaser:
St. James Capital Partners, L.P.
c/o St. James Capital Corp.
1980 Post Oak Boulevard, Suite 2030
Houston, Texas 77056
Attn: John L. Thompson
5.3 Miscellaneous. This Agreement (i) constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, among the parties, or any of them, with respect to the
subject matter hereof, (ii) shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns and is not
intended to confer upon any other person any rights or remedies hereunder,
(iii) shall be governed in all respects, including validity, interpretation and
effect, by the laws of the State of Delaware and (iv) may be executed in two or
more counterparts which together shall constitute a single agreement.
5.4 Publicity. Seller and Purchaser promptly shall advise and
cooperate with the other prior to issuing, or permitting any of its directors,
officers, employees or agents to issue, any press release with respect to this
Agreement or the explicit transactions contemplated hereby. Notwithstanding
the foregoing, without the prior consent of the Purchaser, neither Seller nor
any of its directors, officers, employees or agents shall issue any press
release which includes the name of the Purchaser or any of the Purchaser'
affiliates.
5.5 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by either of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party.
5.6 Schedules. All statements contained in any exhibit, schedule,
appendix, certificate or other instrument delivered by or on behalf of the
parties hereto, or in connection with the transactions contemplated hereby, are
an integral part of this Agreement and shall be deemed representations and
warranties hereunder.
5.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which constitutes an original execution and, in the
aggregate, constitute a single document.
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SELLER'S SIGNATURE PAGE
IN WITNESS WHEREOF, Seller has signed this Agreement as of the date
first written above.
ACR GROUP, INC.
By: /s/ ALEX TREVINO, JR.
--------------------------------
Alex Trevino, Jr., President
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<PAGE> 10
PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, Purchaser has signed this Agreement as of the date first
written above.
ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp., its
General Partner
/s/ JOHN L. THOMPSON
--------------------------------------
John L. Thompson, President
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<PAGE> 1
EXHIBIT 10.16
THE SECURITIES REPRESENTED BY THIS NOTE AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY OTHER APPLICABLE SECURITIES LAWS AND, ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS NOTE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
ACR GROUP, INC.
10% Convertible Promissory Note
$1,400,000 Houston, Texas January 24, 1997
ACR Group, Inc., a Texas corporation (hereinafter called the
"Company," which term includes any successor corporation), and its Subsidiaries
(as such term is hereinafter defined), for value received, hereby promises to
pay to St. James Capital Partners, L.P., a Delaware limited partnership
(hereinafter called "Holder"), or its registered assigns, the principal sum of
One Million Four Hundred Thousand Dollars ($1,400,000) (or such lesser amount
as may be then outstanding hereunder) together with interest on the amount of
such principal sum from time to time outstanding, payable in accordance with
the terms set forth below.
THE OBLIGATIONS OF THE COMPANY CONTAINED IN THIS NOTE ARE SECURED BY
THE SECURITY IN DOCUMENTS (AS HEREINAFTER DEFINED). THIS NOTE IS SUBORDINATE
IN CERTAIN RESPECTS TO CERTAIN DEBT PAYABLE TO NATIONSBANK OF TEXAS, N.A.
(TOGETHER WITH ITS SUCCESSORS AND ASSIGNS, "NATIONSBANK").
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
1.1 Definitions. For all purposes of this Note, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(b) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with generally
accepted accounting principles as promulgated from time to time by the
Association of Independent Certified Public Accountants; and
(C) the words "herein," "hereof" and "hereunder" and
other words of similar import refer to this Note as a whole and not to
any particular Article, Section or other subdivision.
"Board of Directors " means the board of directors of the Company as
elected from time to time or any duly authorized committee of that board.
<PAGE> 2
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in Houston, Texas are
authorized or obligated by law or executive order to be closed.
"Common Stock" means shares of common stock, par value $0.01 per
share, of the Company.
"Company Financial Statements" shall mean those audited financial
statements of the Company included in the Company's most recent annual report
as filed with the United States Securities and Exchange Commission on Form
10-K, and any amendments thereto.
"Conversion Price" means the price per share determined in accordance
with Articles IV and V (as adjusted in accordance with the terms of this Note)
at which shares of Common Stock shall be delivered to Holder upon conversion of
this Note into Common Stock.
"Default" means any event which is, or after notice or passage of time
would be, an Event of Default.
"Default Rights" means any action by NationsBank to (i) suspend
further advances to the Company or any Subsidiary of the Company or (ii) offset
any accounts of the Company or any Subsidiary of the Company with NationsBank.
"Event of Default" has the meaning specified in L Section 3.1.
"Final Maturity Date," when used with respect to this Note, means
January 24, 1999 (or such earlier date upon which this Note becomes due and
payable under Section 3.2).
"Indebtedness" of any Person means all indebtedness of such Person,
whether outstanding on the date of this Note or hereafter created, incurred,
assumed or guaranteed, (a) for the principal of and premium, if any, and
interest on all debts of the Person whether outstanding on the date of this
Note or thereafter created (i) for money borrowed by such Person (including
capitalized lease obligations), (ii) for money borrowed by others (including
capitalized lease obligations) and guaranteed, directly or indirectly, by such
Person, or (iii) constituting purchase money indebtedness, or indebtedness
secured by property at the time of the acquisition of such property by such
Person, for the payment of which the Person is directly or contingently liable;
(b) for all accrued obligations of the Person in respect of any contract,
agreement or instrument imposing an obligation upon the Person to pay over
funds; (c) for all trade debt of the Person; and (d) for all deferrals,
renewals, extensions and refundings of, and amendments, modifications and
supplements to, any of the indebtedness referred to in (a), (b) or (c) above.
"Initial Maturity Date," when used with respect to this Note, means
January 24, 1998 (or such earlier date upon which this Note is due and payable
under Section 3.2).
"Market Price" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined by reference to the last
reported sale price for the Common Stock on such day on the principal
securities exchange on which the Common Stock is listed or admitted to trading
or if no such sale takes place on such date, the average of the closing bid and
asked prices thereof as officially reported, or, if not so listed or admitted
to trading on any securities exchange, the last sale price
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for the Common Stock on the National Association of Securities Dealers
small-cap or national market system, as the case may be, on such date, or, if
there shall have been no trading on such date or if the Common Stock shall not
be listed on such system, the average of the closing bid and asked prices in
the over-the-counter market as furnished by any NASD member firm selected from
time to time by the Company for such purpose.
"NationsBank Loan Agreement" means that certain Loan Agreement dated
as of the 8th day of March, 1994, executed by the Company in favor of
NationsBank, as the same may from time to time be modified, supplemented,
amended or restated pursuant to the terms thereof.
"Note" means this 10% Convertible Promissory Note, as hereafter
amended, modified, substituted or replaced.
"Outside Financing" shall be defined as any transaction where the
Company or any Subsidiary, now or hereafter acquired, sells its equity or debt
securities for cash whether in public or private offerings or bond financings,
provided, however, that an Outside Financing shall not include any transactions
involving (i) the sale of any securities of the Company for the sole purpose of
financing acquisitions, (ii) the issuance of shares of Common Stock pursuant to
existing stock options to employees, officers and directors or existing plans
covering such persons, (iii) any increasing or refinancing of the Company's
existing line of credit facility With NationsBank of Texas, N.A. (or any
successor-in-interest), provided that (a) such debt is utilized for purposes
similar to those set forth in such line of credit facility as of the date
hereof and (b) the borrowing base limitations, as set forth in Section 3.11
of the NationsBank Loan Agreement as of the date hereof, are not modified or
amended other than to increase the applicable percentage of "Other Eligible
Inventory" referenced therein to not more than fifty percent (50%), (iv) any
refinancing or increasing of the Company's existing credit facility with The
Catalyst Fund, Ltd., provided that the aggregate principal amount of all such
debt does not exceed $1,000,000, (v) purchase money debt incurred to finance
equipment and inventory in the ordinary course of business and (vi) debt or
other obligations arising under sale-leaseback transactions involving the
Company's or any of its Subsidiaries' existing land and buildings.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.
"Purchase Agreement" means that certain Agreement of Purchase and Sale
dated of even date herewith, by and between the Company and the Holder.
"SEC" means the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act of 1933, as
amended.
"Security Documents" means the Borrower Security Agreement, the
Subsidiary Security Agreement, the Subsidiary Guaranty and the Collateral
Agency Agreement, each of even date herewith, the forms of which are attached
as exhibits to the Purchase Agreement.
"Significant Subsidiary" means, at any time, any Subsidiary of the
Company that constitutes a "significant subsidiary" of the Company within the
meaning of Rule 1-02 of Regulation S-X under the Securities Act of 1933, as
amended.
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"Subsidiary" means a corporation or other entity more than 50% of the
outstanding voting stock of which, or more than 50% of the equity interest in
which, is owned, directly or indirectly, by the Company or by one or more other
Subsidiary of the Company, or by any combination of the Company and one or more
other Subsidiaries. For purposes of this definition, "voting stock" means
stock which ordinarily has voting power for the election of directors, whether
at all times or only so long as no senior class of stock has such voting power
by reason of any contingency.
ARTICLE II
PAYMENTS
2.1 Interest. From the date of this Note through the Initial
Maturity Date or the Final Maturity Date, as the case may be, interest shall
accrue hereunder on the unpaid outstanding principal sum of this Note at 10%
per annum calculated on the basis of a 360 day year. All past due amounts of
principal and interest shall bear interest at 15% per annum calculated on the
basis of a 360 day year until paid.
2.2 Payment of Principal and Interest. The principal and unpaid
interest of this Note shall be due and payable in full on the Initial Maturity
Date; provided however, that the Company has the right to extend this Note
until the Final Maturity Date by providing Holder with written notice of its
intent to extend this Note, such notice to be received by Holder at least 30
days prior to the Initial Maturity Date. Notwithstanding anything else to the
contrary set forth herein, if this Note is not paid in full by the Initial
Maturity Date, Holder is entitled to, and the Company shall deliver to Holder,
an executed warrant, the form of which shall be substantially identical to the
form of warrant attached as an Exhibit to the Purchase Agreement (including the
Exercise Price, as such term is defined therein), such warrant expiring five
years from the date of such issuance and covering a number of shares of Common
Stock equal to 10% of the then existing principal balance due under this Note.
2.3 Prepayments. Subject to Holder's right to convert, at any
time before the Initial Maturity Date or the Final Maturity Date, as the case
may be, the Company may prepay this Note, in whole or in part, upon five days'
prior written notice given to Holder pursuant to Section 7.6; provided that
this Note shall be mandatory prepaid on the second Business Day following the
occurrence of any Outside Financing, such prepayment to be in an amount equal
to the net proceeds received by the Company or any Subsidiary from such Outside
Financing but not to exceed the then outstanding principal and accrued and
unpaid interest on this Note. All payments made under this Note shall be
applied first to accrued interest, and the balance, if any, to principal;
provided, however, that interest shall accrue on any remaining principal
balance and shall be payable at the rate provided above.
2.4 Manner of Payment. Payments of principal and interest on this
Note will be made by delivery of checks to Holder at its address as set forth
in this Note or wire transfers pursuant to instructions from Holder. If the
date upon which the payment of principal and interest is required to be made
pursuant to this Note occurs other than on a Business Day, then such payment of
principal and interest shall be made on the next occurring Business Day
following said payment date and shall include interest through said next
occurring Business Day.
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ARTICLE III
REMEDIES
3.1 Events of Default. An "Event of Default" occurs if:
(a) the Company defaults in the payment of the principal
or interest on this Note when such principal or interest becomes due
and payable and such default remains uncured for a period of five days;
or
(b) the Company defaults in the performance of any
covenant made by the Company, and such default remains uncured for a
period of 30 days in any of (i) the Purchase Agreement, (ii) that
certain Common Stock Purchase Warrant dated of even date herewith,
issued by the Company to the Holder, pursuant to which the Company
grants to the Holder certain rights to purchase shares of Common Stock
(the "Warrants"); (iii) that certain Registration Rights Agreement
dated of even date herewith, by and between the Company and the
Holder, pursuant to which the Company grants to the Holder certain
registration rights in respect of the shares of Common Stock that may
be acquired on the conversion of the Note and upon exercise of the
Warrants (the "Registration Rights Agreement"); (iv) the Security
Documents; or (v) this Note (other than a default in the performance
of a covenant specifically addressed elsewhere in this Section 3. 1);
or
(c) any representation or warranty made by the Company in
the Purchase Agreement, the Warrants, the Registration Rights
Agreement, or this Note or in any certificate furnished by the Company
in connection with the consummation of the transaction contemplated
thereby or hereby, is untrue in any material respect as of the date of
making thereof; or
(d) the Company or any Significant Subsidiary defaults in
the payment when due (whether by lapse of time, by declaration, by
call for redemption or otherwise) of the principal of or interest on
any Indebtedness of the Company or such Significant Subsidiary (other
than the Indebtedness evidenced by this Note) having an aggregate
principal amount in excess of $250,000 and such default remains
uncured for a period of 30 days; or
(e) a court of competent jurisdiction enters a judgment
or judgments against the Company or any Significant Subsidiary, or any
property or assets of the Company or any Significant Subsidiary, for
the payment of money aggregating in excess of $500,000 in excess of
applicable insurance coverage; or
(f) a court of competent jurisdiction enters (i) a decree
or order for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other
similar law or (ii) a decree or order adjudging the Company or any
Significant Subsidiary a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or any
Significant Subsidiary under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any
Significant Subsidiary or of any substantial part of the property of
the Company or any Significant Subsidiary or ordering the winding up
or liquidation of the affairs of the Company or any Significant
Subsidiary and any such decree or
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<PAGE> 6
order of relief or any such other decree or order remains unstayed for
a period of 90 days from its date of entry; or
(g) the Company or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or any
other case or proceeding to be adjudicated as bankrupt or insolvent, or
the Company or any Significant Subsidiary files a petition, answer or
consent seeking reorganization or relief under any applicable federal
or state law, or the Company or any Significant Subsidiary makes an
assignment for the benefit of creditors, or admits in writing its
inability to pay its debts generally as they become due; or
(h) (1) any person or group (within the meaning of
Section 13(d) of the Securities Exchange Act of 1934) becomes the
beneficial owner of 40% or more of the total voting power of the
Company and was not the beneficial owner of 40% or more of the total
voting power of the Company as of the date of this Agreement; (2) the
Company or any Subsidiary merges or consolidates with or into any other
Person (unless the Company or any of its Subsidiaries is the surviving
or acquiring party); (3) the Company or any Subsidiary dissolves or
liquidates; or (4) the Company or any Subsidiary sells all or any
substantial portion of its assets (unless the purchaser is a Subsidiary
of the Company).
3.2 Acceleration of Maturity. This Note shall become immediately
due and payable if an Event of Default described in Sections 3.l(f), 3.l(g),
3.1(h) or 3.1(i) occurs and, this Note shall, at the option of the Holder
in its sole discretion, become immediately due and payable if any other Event
of Default occurs, and in every such case the Holder of the Note may declare
the principal and interest on the Note to be due and payable immediately.
ARTICLE IV
CONVERSION OF NOTE
4.1 Conversion Privilege and Conversion Price. Subject to and upon
compliance with the provisions of this Article, at the option of Holder, all or
any part of this Note may be converted at any time, at the principal amount
hereof together with accrued and unpaid interest thereon, into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100 of
a share) of Common Stock at the Conversion Price, determined as hereinafter
provided, in effect at the time of conversion. The Conversion Price shall be
initially $2.40 per share of Common Stock. Notwithstanding anything else to
the contrary set forth herein, the Holder shall have the right to convert this
Note pursuant to the terms set forth herein at anytime, including the 30
Business Days following (i) the expiration of the Initial Maturity Date or the
Final Maturity Date, as the case may be, or (ii) any prepayment pursuant to
Section 2.3 hereof. If Holder elects to convert this Note after a prepayment
has been made pursuant to Section 2.3, then Holder shall return all or such
portion of the funds paid to Holder as to which Holder has elected to convert.
4.2 Company Conversion Privilege. If, at any time, the Market
Price of the Common Stock for each of the previous 20 consecutive trading days
shall be $3.25 or more, then, upon ten days notice from the Company to the
Holder, the Company shall have the right to require the Note to be converted
into Common Stock at the Conversion Price in effect on the date of said
conversion, provided that the shares of Common Stock are traded on the NASDAQ
national market and, if not traded on the NASDAQ
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<PAGE> 7
national market, have an average trading volume of at least 25,000 shares for
such 20 consecutive day period. The trading volume limitation set forth in the
preceding sentence shall not be applicable on the Initial Maturity Date and the
Final Maturity Date, if applicable, provided that the Market Price of the
Common Stock for each of the 20 consecutive trading days prior to such dates is
$3.25 or more. Notwithstanding the foregoing, in no event shall the Company be
entitled to require the Note to be converted, unless there is an effective
registration statement covering the shares of Common Stock to be issued upon
conversion.
ARTICLE V
ADJUSTMENT OF CONVERSION PRICE
5.1 Anti-Dilution Provisions. The Conversion Price shall be
subject to adjustment from time to time as hereinafter provided. Upon each
adjustment of the Conversion Price, the holder of this Note shall thereafter be
entitled to purchase, at the Conversion Price resulting from such adjustment,
the number of shares of Common Stock obtained by multiplying the Conversion
Price in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Conversion Price resulting from such adjustment.
5.2 Adjustment of Conversion Price Upon Issuance of Common Stock.
5.2.1 (A) If and whenever after the date hereof the
Company shall issue or sell any Common Stock for no consideration or for a
consideration per share less than the Conversion Price then, forthwith, upon
such issue or sale, the Conversion Price shall be reduced (but not increased,
except as otherwise specifically provided in Section 5.2.2), to the price
(calculated to the nearest one-ten thousandth of a cent) determined by dividing
(x) an amount equal to the sum of (i) the aggregate number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the then
existing Conversion Price plus (ii) the consideration received by the Company
upon such issue or sale by (y) the aggregate number of shares of Common Stock
outstanding immediately after such issue or sale.
(B) Notwithstanding the provisions of this Section
5.2, no adjustment shall be made in the Conversion Price in the event that the
Company issues, in one or more transactions, (i) Common Stock upon exercise of
any options issued to officers, directors or employees of the Company pursuant
to a stock option plan or an employment, severance or consulting agreement as
now or hereafter in effect, in each case approved by the Board of Directors
(provided that the aggregate number of shares of Common Stock which may be
issuable, including options issued prior to the date hereof, under all such
employee plans and agreements shall at no time exceed the number of such shares
of Common Stock outstanding on the date hereof on a fully diluted basis that are
issuable under currently effective employee plans and agreements); (ii) Common
Stock upon exercise of this Note or any other warrant issued pursuant to the
terms of the Purchase Agreement; (iii) Common Stock upon exercise of any stock
purchase warrant or option (other than the options referred to in clause (i)
above) or other convertible security outstanding on the date hereof; or (iv)
Common Stock issued as consideration in acquisitions. In addition, for purposes
of calculating any adjustment of the Conversion Price as provided in this
Section 5.2, all of the shares of Common Stock issuable pursuant to any of the
foregoing shall be assumed to be outstanding prior to the event causing such
adjustment to be made.
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5.2.2 For purposes of this Section 5.2, the following shall
be applicable:
(A) Issuance of Rights or Options. In case at any time
after the date hereof the Company shall in any manner grant (whether
directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or securities convertible into or
exchangeable for Common Stock (such convertible or exchangeable stock
or securities being herein called "Convertible Securities"), whether
or not such rights or options or the right to convert or exchange any
such Convertible Securities are immediately exercisable, and the price
per share for which shares of Common Stock are issuable upon the
exercise of such rights or options or upon conversion or exchange of
such Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Company as consideration
for the granting of such rights or options, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company
upon the exercise of such rights or options, or plus, in the case of
such rights or options that relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of such rights or
options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options) shall
be less than the Conversion Price in effect as of the date of granting
such rights or options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such rights or options or
upon conversion or exchange of all such Convertible Securities
issuable upon the exercise of such rights or options shall be deemed
to be outstanding as of the date of the granting of such rights or
options and to have been issued for such price per share, with the
effect on the Conversion Price specified in Section 5.2.1 hereof.
Except as provided in Section 5.2.2 hereof, no further adjustment of
the Conversion Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon exercise of such
rights or options or upon the actual issuance of such Common Stock
upon conversion or exchange of such Convertible Securities.
(B) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase
price provided for in any right or option referred to in Section
5.2.2(A) above, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
Section 5.2.2(A) hereof, or the rate at which any Convertible
Securities referred to in Section 5.2.2(A) hereof, are convertible
into or exchangeable for Common Stock shall change (other than under
or by reason of provisions designed to protect against dilution), the
Conversion Price then in effect hereunder shall forthwith be
readjusted (increased or decreased, as the case may be) to the
Conversion Price that would have been in effect at such time had such
rights, options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially granted,
issued or sold. On the expiration of any such option or right
referred to in Section 5.2.2(A) hereof, or on the termination of any
such right to convert or exchange any such Convertible Securities
referred to in Section 5.2.2(A) hereof, the Conversion Price then in
effect hereunder shall forthwith be readjusted (increased or
decreased, as the case may be) to the Conversion Price that would have
been in effect at the time of such expiration or termination had such
right, option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination, never been
granted, issued or sold, and the Common Stock issuable thereunder
shall no longer be deemed to be outstanding. If the purchase price
provided for in Section 5.2.2(A) hereof or the rate at which any
Convertible
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<PAGE> 9
Securities referred to in Section 5.2.2(A) hereof are convertible into
or exchangeable for Common Stock shall be reduced at any time under or
by reason of provisions with respect thereto designed to protect
against dilution, then in case of the delivery of Common Stock upon
the exercise of any such right or option or upon conversion or
exchange of any such Convertible Securities, the Conversion Price then
in effect hereunder shall, if not already adjusted, forthwith be
adjusted to such amount as would have obtained had such right, option
or Convertible Securities never been issued as to such Common Stock
and had adjustments been made upon the issuance of the Common Stock
delivered as aforesaid, but only if as a result of such adjustment the
Conversion Price then in effect hereunder is thereby reduced.
(C) Consideration for Stock. In case at any time Common
Stock or Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities shall be issued or
sold for cash, the consideration therefor shall be deemed to be the
amount received by the Company therefor. In case at any time any
Common Stock, Convertible Securities or any rights or options to
purchase any such Common Stock or Convertible Securities shall be
issued or sold for consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed
to be the fair value of such consideration, as determined reasonably
and in good faith by the Board of Directors of the Company. In case
at any time any Common Stock, Convertible Securities or any rights or
options to purchase any Common Stock or Convertible Securities shall
be issued in connection with any merger or consolidation in which the
Company is the surviving corporation, the amount of consideration
received therefor shall be deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Company,
of such portion of the assets and business of the nonsurviving
corporation as such Board of Directors may determine to be
attributable to such Common Stock, Convertible Securities, rights or
options as the case may be. In case at any time any rights or options
to purchase any shares of Common Stock or Convertible Securities shall
be issued in connection with the issuance and sale of other securities
of the Company, together consisting of one integral transaction in
which no consideration is allocated to such rights or options by the
parties, such rights or options shall be deemed to have been issued
without consideration.
(D) Record Date. In case the Company shall take a record
of the holders of its Common Stock for the purpose of entitling them
(i) to receive a dividend or other distribution payable in Common
Stock or Convertible Securities, or (ii) to subscribe for or purchase
Common Stock or Convertible Securities, then such record date shall be
deemed to be the date of the issuance or sale of the Common Stock or
Convertible Securities deemed to have been issued or sold as a result
of the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription
or purchase, as the case may be.
(E) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned
directly by the Company in treasury, and the disposition of any such
shares shall be considered an issuance or sale of Common Stock for the
purpose of this Section 5.2.
5.3 Stock Dividends. In case the Company shall declare a dividend
or make any other distribution upon any shares of the Company, payable in
Common Stock or Convertible Securities, any Common Stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
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<PAGE> 10
5.4 Stock Splits and Reverse Splits. In the event that the
Company shall at any time subdivide its outstanding shares of Common Stock into
a greater number of shares, the Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced and the number of Shares into
which this Note may be converted immediately prior to such. subdivision shall
be proportionately increased, and conversely, in the event that the outstanding
shares of Common Stock shall at any time be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased and the number of Shares into which this
Note may be converted immediately prior to such combination shall be
proportionately reduced. Except as provided in this Section 5.4 no adjustment
in the Conversion Price and no change in the number of Shares shall be made
under this Article v as a result of or by reason of any such subdivision or
combination.
5.5 Reorganizations and Asset Sales. If any capital
reorganization or reclassification of the capital stock of the Company, or any
consolidation, merger or share exchange of the Company with another Person,or
the sale, transfer or other disposition of all or substantially all of its
assets to another Person shall be effected in such a way that holders of Common
Stock shall be entitled to receive capital stock, securities or assets with
respect to or in exchange for their shares, then the following provisions shall
apply:
5.5.1 As a condition of such reorganization,
reclassification, consolidation, merger, share exchange, sale,
transfer or other disposition (except as otherwise provided below in
Section 5.5.3), lawful and adequate provisions shall be made whereby
the holder of this Note shall thereafter have the right to purchase
and receive upon the terms; and conditions specified in this Note and
in lieu of the shares immediately theretofore receivable upon the
exercise of the rights represented hereby, such shares of capital
stock, securities or assets as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares immediately theretofore so
receivable had such reorganization, reclassification, consolidation,
merger, share exchange or sale not taken place, and in any such case
appropriate provision reasonably satisfactory to such holder shall be
made with respect to the rights and interests of such holder to the
end that the provisions hereof (including, without limitation,
provisions for adjustments of the Conversion Price and of the number
of shares receivable upon the exercise) shall thereafter be
applicable, as nearly as possible, in relation to any shares of
capital stock, securities or assets thereafter deliverable upon the
exercise of this Note.
5.5.2 In the event of a merger, share exchange or
consolidation of the Company with or into another Person as a result
of which a number of shares of common stock or its equivalent of the
successor Person greater or lesser than the number of shares of Common
Stock outstanding immediately prior to such merger, share exchange or
consolidation are issuable to holders of Common Stock, then the
Conversion Price in effect immediately prior to such merger, share
exchange or consolidation shall be adjusted in the same manner as
though there were a subdivision or combination of the outstanding
shares of Common Stock.
5.5.3 The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless
prior to or simultaneously with the consummation thereof the
successor Person (if other than the Company) resulting from such
consolidation, share exchange or merger or the Person purchasing or
otherwise acquiring such assets shall have assumed by written
instrument executed and mailed or delivered to the Holder hereof at
the last address of such Holder appearing on the books of the Company
the obligation to deliver to such Holder such shares of capital stock,
securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to receive, and all other liabilities and
obligations of the Company hereunder. Upon written request by
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<PAGE> 11
the Holder hereof, such Successor Person will issue a new Note revised to
reflect the modifications in this Note effected pursuant to this Section 5.5
5.5.4 If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share exchange or
sale, transfer or other disposition of all or substantially all of the Company's
assets with the Person having made such offer or with any affiliate of such
Person, unless prior to the consummation of such consolidation, merger, share
exchange, sale, transfer or other disposition the holder hereof shall have been
given a reasonable opportunity to then elect to receive upon the conversion of
this Note either the capital stock, securities or assets then issuable with
respect to the Common Stock or the capital stock, securities or assets, or the
equivalent, issued to previous holders of the Common Stock in accordance with
such offer.
5.6 Adjustment for Asset Distribution. If the Company declares a
dividend or other distribution payable to all holders of shares of Common Stock
in evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or rights thereto) or other property), the Conversion Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per
share of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
5.7 De Minimis Adjustments. No adjustment in the number of shares
of Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon conversion of the Note and no adjustment in the Conversion
Price shall be required unless such adjustment would require an increase or
decrease of at least $.01 in the Conversion Price; provided, however, that any
adjustments which by reason of this Section 5.7 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
5.8 Notice of Adjustment. Whenever the Conversion Price or the
number of Shares issuable upon the conversion of the Note shall be adjusted as
herein provided, or the rights of the holder hereof shall change by reason of
other events specified herein, the Company shall compute the adjusted
Conversion Price and the adjusted number of Shares in accordance with the
provisions hereof and shall prepare an Officer's Certificate setting forth the
adjusted Conversion Price and the adjusted number of Shares issuable upon the
conversion of this Note or specifying the other shares of stock, securities or
assets receivable as a result of such change in rights, and showing in
reasonable detail the facts and calculations upon which such adjustments or
other changes are based. The Company shall cause to be mailed to the Holder
hereof copies of such Officer's Certificate together with a notice stating that
the Conversion Price and the number of Shares purchasable upon conversion of
this Note have been adjusted and setting forth the adjusted Conversion Price
and the adjusted number of Shares purchasable upon conversion of this Note.
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<PAGE> 12
5.9 Notifications to Holders. In case at any time the Company
proposes:
(i) to declare any dividend upon its Common Stock payable
in capital stock or make any special dividend or other distribution
(other than cash dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the
holders of its Common Stock any additional shares of capital stock of
any class or other rights;
(iii) to effect any capital reorganization, or
reclassification of the capital stock of the Company, or
consolidation, merger or share exchange of the Company with another
Person, or sale, transfer or other disposition of all or substantially
all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the holder
hereof (a) at least 10 days (but not more than 90 days) prior written notice of
the date on which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such issuance, reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer,
disposition, dissolution, liquidation or winding up, and (b) in the case of any
such issuance, reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
at least 10 days (but not more than 90 days) prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution
or subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock, as the case may be, for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, as the case may be.
5.10 Company to Prevent Dilution. If any event or condition occurs
as to which other provisions of this Article are not strictly applicable or if
strictly applicable would not fairly protect the exercise or purchase rights of
this Note evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect
the exercise or purchase rights of the holder hereof under any provisions of
this Note, then the Company shall make such adjustments in the application of
such provisions, in accordance with such essential intent and principles, so as
to protect such exercise and purchase rights as aforesaid, and any adjustments
necessary with respect to the Conversion Price and the number of shares
purchasable hereunder so as to preserve the rights of the holder hereunder. In
no event shall any such adjustment have the effect of increasing the Conversion
Price as otherwise determined pursuant to this Article except in the event of a
combination of shares of the type contemplated in Section 5.4 hereof, and then
in no event to an amount greater than the Conversion Price as adjusted pursuant
to Section 5.4 hereof.
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<PAGE> 13
ARTICLE VI
COVENANTS
The Company covenants and agrees that, so long as this Note is
outstanding:
6.1 Payment of Principal and Accrued Interest. The Company will
duly and punctually pay or cause to be paid the principal sum of this Note,
together with interest accrued thereon from the date hereof to the date of
payment, in accordance with the terms hereof.
6.2 Corporate Existence. The Company will do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence, rights (charter and statutory) and franchises; provided, however,
that the Company shall not be required to preserve any such right or franchise
if it shall reasonably determine that the preservation thereof is no longer
desirable in the conduct of its business.
6.3 Taxes; Claims; etc. The Company will, and will cause each
Subsidiary to, promptly pay and discharge all lawful taxes, assessments, and
governmental charges or levies imposed upon it or upon its income or profits, or
upon any of its properties, real, personal, or mixed, before the same shall
become in default, as well as all lawful claims for labor, materials, and
supplies or otherwise which, if unpaid, might become a lien or charge upon such
properties or any part thereof, and which lien or charges will have a material
adverse effect on the business of the Company; provided, however, that neither
the Company nor any Subsidiary shall be required to pay or cause to be paid any
such tax, assessment, charge, levy, or claim prior to institution of
foreclosure proceedings if the validity thereof shall concurrently be contested
in good faith by appropriate proceedings and if the Company shall have
established reserves deemed by the Company adequate with respect to such tax,
assessment, charge, levy, or claim.
6.4 Maintenance of Existence and Properties. The Company will,
and will cause each Subsidiary to, keep its material properties in good repair,
working order, and condition, ordinary wear and tear excepted, so that the
business carried on may be properly conducted at all times in accordance with
prudent business management.
6.5 SEC Reports. The Company will deliver to the Holder within 20
days after it files them with the SEC, copies of its annual and quarterly
reports and of the information, documents, and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. The Company will
timely comply with its reporting and filing obligations under the applicable
federal securities laws.
6.6 Notice of Defaults. The Company will promptly notify the
Holder in writing of the occurrence of (i) any Event of Default under this
Note, and (ii) any event of default (or if any event of default would result
upon any payment with respect to this Note) with respect to any Indebtedness as
such event of default is defined therein or in the instrument under which it is
outstanding, permitting holders to accelerate the maturity of such
Indebtedness.
6.7 Compliance with Laws. The Company will promptly comply with
all laws, ordinances and governmental rules and regulations to which it is
subject, the violation of which would materially and adversely affect the
Company.
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<PAGE> 14
ARTICLE VII
MISCELLANEOUS
7.1 Collection; Fees. If this Note is placed in the hands of an
attorney for collection, and if it is collected through any legal proceedings
at law or in equity or in bankruptcy, receivership or other court proceedings,
the Company hereby undertakes to pay all costs and expenses of collection
including, but not limited to, court costs and the reasonable attorney's fees
of Holder.
7.2 Consent to Amendments. This Note may be amended, and the
Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, if and only if the Company shall obtain
the written consent to such amendment, action or omission to act from the
holders of 51% of the aggregate principal amount of this Note.
7.3 Benefits of Note; No Impairment of Rights of Holder of Senior
Indebtedness. Nothing in this Note, express or implied, shall give to any
Person, other than the Company, Holder, and their successors any benefit or any
legal or equitable right, remedy or claim under or in respect of this Note.
7.4 Successors and Assigns. All covenants and agreements in this
Note contained by or on behalf of the Company and the Holder shall bind and
inure to the benefit of the respective successors and assigns of the Company
and the Holder.
7.5 Restrictions on Transfer. Subject to the provisions of this
Section 7.5, this Note is transferable in the same manner and with the same
effect as in the case of a negotiable instrument payable to a specified person.
Prior to any transfer as provided herein, the transferor shall provide written
notice to the Company. The Company, however, may treat Holder as the owner
hereof for all purposes until this Note shall have been surrendered for
transfer as hereinafter provided. Upon surrender of this Note duly executed by
Holder or his agent or attorney, the Company shall execute and deliver a new
Note in the name of the assignee or assignees and in the denominations
specified in such instrument of assignment, and this Note shall promptly be
canceled.
7.6 Notice; Address of Parties. Except as otherwise provided, all
communications to the Company or Holder provided for herein or with reference
to this Note shall be deemed to have been sufficiently given or served for all
purposes on the third business day after being sent as certified or registered
mail, postage and charges prepaid, to the following addresses: if to the
Company: 3200 Wilcrest Drive, Suite 440, Houston, Texas 77042 or at any other
address designated by the Company in writing to Holder; if to Holder: St. James
Capital Partners, L.P., c/o St. James Capital Corp., 1980 Post Oak Boulevard,
Suite 2030, Houston, Texas 77056, Attn: John L. Thompson, or at any other
address designated by Holder to the Company in writing.
7.7 Separability Clause. In case any provision in this Note shall
be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions in such jurisdiction
shall not in any way be affected or impaired thereby; provided, however, such
construction does not destroy the essence of the bargain provided for
hereunder.
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<PAGE> 15
7.8 Governing Law. This Note shall be governed by, and construed
in accordance with, the internal laws of the State of Delaware (without regard
to principles of choice of law).
7.9 Usury. It is the intention of the parties hereto to conform
strictly to the applicable laws of the State of Delaware and the United States
of America, and judicial or administrative interpretations or determinations
thereof regarding the contracting for, charging and receiving of interest for
the use, forbearance, and detention of money (hereinafter referred to in this
Section 7.9 as "Applicable Law"). The Holder shall have no right to claim, to
charge or to receive any interest in excess of the maximum rate of interest, if
any, permitted to be charged on that portion of the amount representing
principal which is outstanding and unpaid from time to time by Applicable Law.
Determination of the rate of interest for the purpose of determining whether
this Note is usurious under Applicable Law shall be made by amortizing,
prorating, allocating and spreading in equal parts during the period of the
actual time of this Note, all interest or other sums deemed to be interest
(hereinafter referred to in this Section 7.9 as "Interest") at any time
contracted for, charged or received from the Company in connection with this
Note. Any Interest contracted for, charged or received in excess of the maximum
rate allowed by Applicable Law shall be deemed a result of a mathematical error
and a mistake. If this Note is paid in part prior to the end of the full stated
term of this Note and the Interest received for the actual period of existence
of this Note exceeds the maximum rate allowed by Applicable Law, Holder shall
credit the amount of the excess against any amount owing under this Note or, if
this Note has been paid in full, or in the event that it has been accelerated
prior to maturity, Holder shall refund to the Company the amount of such
excess, and shall not be subject to any of the penalties provided by Applicable
Law for contracting for, charging or receiving Interest in excess of the
maximum rate allowed by Applicable Law. Any such excess which is unpaid shall
be canceled.
7.10 Subordination to NationsBank. Holder agrees that no payments
other than Permitted Payments (as hereinafter defined) shall be made by the
Company without the prior written consent of NationsBank to which the Company
may be indebted from time to time ("NationsBank Debt"). As used herein,
"Permitted Payments" shall mean (i) the payment of principal and interest
payment due on this Note on January 23, 1999 ("Maturity Payment"), (ii) any
repayment of principal and interest made with the proceeds of a public or
private offering of common or preferred stock of Company or (iii) any repayment
of principal and interest made with the proceeds of a placement of subordinated
debt with terms and conditions reasonably acceptable to NationsBank. Holder
agrees that the Maturity Payment shall not be received on this Note during the
continuance of an Event of Default (as defined in the NationsBank Loan
Agreement after any applicable cure periods) or if such Maturity Payment would
cause the occurrence of an Event of Default. Upon the occurrence and
continuance of a suspension of the Maturity Payment on this Note, the Maturity
Payment on this Note shall be automatically reinstated upon the expiration of
90 days following the date on which such Maturity Payment was suspended if,
within such 90-day period, NationsBank shall not have accelerated the
NationsBank Debt or exercised one or more of the Default Rights available to
NationsBank, even if such payment would cause the occurrence of an Event of
Default, provided that the Maturity Payment shall be automatically reinstated
if prior to the expiration of such ninety (90) day period NationsBank resumes
advances to Company.
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<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed on the date first above written.
ACR GROUP, INC.
By: /s/ ANTHONY R. MARESCA
--------------------------------------
Anthony R. Maresca, Senior Vice President
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<PAGE> 1
EXHIBIT 10.17
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND,
ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE RESOLD,
PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE
SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
WARRANT
to Purchase Common Stock of
ACR GROUP, INC.
Expiring on January 24, 2002
This Common Stock Purchase Warrant (the "Warrant") certifies that for
value received, St. James Capital Partners, L.P., a Delaware limited
partnership (the "Holder") or its assigns, is entitled to subscribe for and
purchase from the Company (as hereinafter defined), in whole or in part,
280,000 shares of duly authorized, validly issued, fully paid and nonassessable
shares of Common Stock (as hereinafter defined) at an initial Exercise Price
(as hereinafter defined) per share of $1.625, subject, however, to the
provisions and upon the terms and conditions hereinafter set forth. The number
of Warrants (as hereinafter defined), the number of shares of Common Stock
purchasable hereunder, and the Exercise Price therefor are subject to
adjustment as hereinafter set forth. This Warrant and all rights hereunder
shall expire at 5:00 p.m., Houston, Texas time, on January 24, 2002.
As used herein, the following terms shall have the meanings set
forth below:
"Company" shall mean ACR Group, Inc., a Texas corporation, and shall
also include any successor thereto with respect to the obligations hereunder,
by merger, consolidation or otherwise.
"Common Stock" shall mean and include the Company's Common Stock, par
value $0.01 per share, authorized on the date of the original issue of this
Warrant and shall, also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale, transfer or
other disposition of assets of the character referred to in Section 3.5 hereof,
the stock, securities provided for in such Section 3.5, and (ii) any other
shares of common stock of the Company into which such shares of Common Stock
may be converted.
"Exercise Price" shall mean the initial purchase price of $1.625 per
share of Common Stock payable upon exercise of the Warrants, as adjusted from
time to time pursuant to the provisions hereof.
"Market Price" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined as follows: (x) the last
reported sale price for the Common Stock on such day on the principal
securities exchange on which the Common Stock is listed or admitted to trading
or if no such sale takes place on such date, the average of the closing bid and
asked prices thereof as officially reported, or, if not so listed or admitted
to trading on any securities exchange, the last sale price
<PAGE> 2
for the Common Stock on the National Association of Securities Dealers SmallCap
Market on such date, or, if there shall have been no trading on such date or if
the Common Stock shall not be listed on such system, the average of the closing
bid and asked prices in the over-the-counter market as furnished by any NASD
member firm selected from time to time by the Company for such purpose, in each
such case, unless otherwise provided herein, averaged over a period of ten (10)
consecutive Trading Days prior to the date as of which the determination is to
be made; or (y) if the Common Stock shall not be listed or admitted to trading
as provided in clause (x) above, the fair market value of the Common Stock as
determined in good faith by the Board of Directors of the Company.
"Note" shall mean the 10% Convertible Promissory Note of the Company
issued to St. James Capital Partners, L.P. as of the date hereof in the
original principal amount of $1,400,000.
"Outstanding," when used with reference to Common Stock, shall mean
(except as otherwise expressly provided herein) at any date as of which the
number of shares thereof is to be determined, all issued shares of Common
Stock, except shares then owned or held by or for the account of the Company.
"Trading Days" shall mean any days during the course of which the
principal securities exchange on which the Common Stock is listed or admitted
to trading is open for the exchange of securities.
"Warrant" shall mean the right upon exercise to purchase one Warrant
Share.
"Warrant Shares" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrants.
ARTICLE I
EXERCISE OF WARRANTS
1.1 Method of Exercise. The Warrants represented hereby may be
exercised by the holder hereof, in whole or in part, at any time and from time
to time on or after the date hereof until 5:00 p.m., Houston, Texas time, on
January 24, 2002. To exercise the Warrants, the holder hereof shall deliver to
the Company, at the Warrant Office designated in Section 2.1 hereof, (i) a
written notice in the form of the Subscription Notice attached as an exhibit
hereto, stating therein the election of such holder to exercise the Warrants in
the manner provided in the Subscription Notice; (ii) payment in full of the
Exercise Price (A) in cash or by bank check for all Warrant Shares purchased
hereunder, or (B) through a "cashless" or "net-issue" exercise of each such
Warrant ("Cashless Exercise"); the holder shall exchange each Warrant subject
to a Cashless Exercise for that number of Warrant Shares determined by
multiplying the number of Warrant Shares issuable hereunder by a fraction, the
numerator of which shall be the difference between (x) the Market Price and (y)
the Exercise Price for each such Warrant, and the denominator of which shall be
the Market Price; the Subscription Notice shall set forth the calculation upon
which the Cashless Exercise is based, or (C) a combination of (A) and (B)
above; and (iii) this Warrant. The Warrants shall be deemed to be exercised on
the date of receipt by the Company of the Subscription Notice, accompanied by
payment for the Warrant Shares and surrender of this Warrant, as aforesaid, and
such date is referred to herein as the "Exercise Date". Upon such exercise, the
Company shall, as promptly as practicable and in any event within ten (10)
business days, issue and deliver to such holder a certificate or certificates
for the full number of the Warrant Shares purchased by such holder hereunder,
and shall, unless the Warrants have expired, deliver to the holder hereof a new
Warrant representing the number of Warrants, if any, that shall not have been
exercised, in all other respects
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identical to this Warrant. As permitted by applicable law, the Person in whose
name the certificates for Common Stock are to be issued shall be deemed to have
become a holder of record of such Common Stock on the Exercise Date and shall
be entitled to all of the benefits of such holder on the Exercise Date,
including without limitation the right to receive dividends and other
distributions for which the record date falls on or after the Exercise Date and
to exercise voting rights.
1.2 Expenses and Taxes. The Company shall pay all expenses, and
taxes (including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes attributable to the preparation,
issuance or delivery of the Warrants and of the shares of Common Stock issuable
upon exercise of the Warrants.
1.3 Reservation of Shares. The Company shall reserve at all times
so long as the Warrants remain outstanding, free from preemptive rights, out of
its treasury Common Stock or its authorized but unissued shares of Common
Stock, or both, solely for the purpose of effecting the exercise of the
Warrants, a sufficient number of shares of Common Stock to provide for the
exercise of the Warrants.
1.4 Valid Issuance. All shares of Common Stock that may be issued
upon exercise of the Warrants will, upon issuance by the Company, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof and, without limiting the
generality of the foregoing, the Company shall take no action or fail to take
any action which will cause a contrary result (including, without limitation,
any action that would cause the Exercise Price to be less than the par value,
if any, of the Common Stock).
1.5 Purchase Agreement. The Warrants represented hereby are part
of a duly authorized issuance and sale of warrants to purchase Common Stock
issued and sold pursuant to that certain Agreement of Purchase and Sale
dated as of January 15, 1997 (the "Agreement"), between the Company and the
holder hereof. The holder hereof shall be entitled to registration under the
Securities Act and any applicable state securities or blue sky laws to the
extent set forth in the Registration Rights Agreement, as amended. The terms of
the Agreement are hereby incorporated herein for all purposes and shall be
considered a part of this Warrant as if they had been fully set forth herein.
Notwithstanding the previous sentence, in the event of any conflict between the
provisions of the Agreement and of this Warrant, the provisions of this Warrant
shall control.
1.6 Acknowledgment of Rights. At the time of the exercise of the
Warrants in accordance with the terms hereof and upon the written request of
the holder hereof, the Company will acknowledge in writing its continuing
obligation to afford to such holder any rights (including, without limitation,
any right to registration of the Warrant Shares) to which such holder shall
continue to be entitled after such exercise in accordance with the provisions
of this Warrant; provided, however, that if the holder hereof shall fail to
make any such request, such failure shall not affect the continuing obligation
of the Company to afford to such holder any such rights.
1.7 No Fractional Shares. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of this Warrant. If
more than one Warrant shall be presented for exercise at the same time by the
same holder, the number of full shares of Common Stock which shall be issuable
upon such exercise shall be computed on the basis of the aggregate number of
whole shares of Common Stock purchasable on exercise of the Warrants so
presented. If any fraction of a share of Common Stock would, except for the
provisions of this Section 1.7, be issuable on the exercise of this Warrant,
the Company shall pay an amount in cash calculated by it to be equal to the
Market Price of one share of
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Common Stock at the time of such exercise multiplied by such fraction computed
to the nearest whole cent.
ARTICLE II
TRANSFER
2.1 Warrant Office. The Company shall maintain an office for
certain purposes specified herein (the "Warrant Office"), which office shall
initially be the Company's offices at 3200 Wilcrest Drive, Suite 440, Houston
Texas 77042, and may subsequently be such other office of the Company or of any
transfer agent of the Common Stock in the continental United States as to which
written notice has previously been given to the holder hereof. The Company
shall maintain, at the Warrant Office, a register for the Warrants in which the
Company shall record the name and address of the Person in whose name this
Warrant has been issued, as well as the name and address of each permitted
assignee of the rights of the registered owner hereof.
2.2 Ownership of Warrants. The Company may deem and treat the
Person in whose name the Warrants are registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any
notice to the contrary until presentation of this Warrant for registration of
transfer as provided in this Article II. Notwithstanding the foregoing, the
Warrants represented hereby, if properly assigned in compliance with this
Article II, may be exercised by an assignee for the purchase of Warrant Shares
without having a new Warrant issued.
2.3 Restrictions on Transfer of Warrants. The Company agrees to
maintain at the Warrant Office books for the registration and transfer of the
Warrants. Subject to the restrictions on transfer of the Warrants in this
Section 2.3, the Company, from time to time, shall register the transfer of the
Warrants in such books upon surrender of this Warrant at the Warrant Office
properly endorsed or accompanied by appropriate instruments of transfer and
written instructions for transfer satisfactory to the Company. Upon any such
transfer and upon payment by the holder or its transferee of any applicable
transfer taxes, new Warrants shall be issued to the transferee and the
transferor (as their respective interests may appear) and the surrendered
Warrants shall be cancelled by the Company. The Company shall pay all taxes
(other than securities transfer taxes or income taxes) and all other expenses
and charges payable in connection with the transfer of the Warrants pursuant to
this Section 2.3.
2.3.1 Restrictions in General. The holder of the Warrants
agrees that it will neither (i) transfer the Warrants prior to delivery to the
Company of written notice of such transfer, nor (ii) transfer such Warrant
Shares prior to delivery to the Company of written notice of such transfer, or
until registration of such Warrant Shares under the Securities Act and any
applicable state securities or blue sky laws has become effective.
2.4 Compliance with Securities Laws. Subject to the terms of the
Registration Rights Agreement between the Holder and the Company dated as of
the date hereof and notwithstanding any other provisions contained in this
Warrant, the holder hereof understands and agrees that the following
restrictions and limitations shall be applicable to all Warrant Shares and to
all resales or other transfers thereof pursuant to the Securities Act:
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2.4.1 The holder hereof agrees that the Warrant Shares
shall not be sold or otherwise transferred unless the Warrant Shares are
registered under the Securities Act and applicable state securities or blue sky
laws or are exempt therefrom.
2.4.2 A legend in substantially the following form will be
placed on the certificate(s) evidencing the Warrant Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY OTHER APPLICABLE SECURITIES LAW AND, ACCORDINGLY, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS."
2.4.3 Stop transfer instructions will be imposed with
respect to the Warrant Shares so as to restrict resale or other transfer
thereof, subject to this Section 2.4.
ARTICLE III
ANTI-DILUTION
3.1 Anti-Dilution Provisions. The Exercise Price shall be subject
to adjustment from time to time as hereinafter provided. Upon each adjustment
of the Exercise Price, the holder of this Warrant shall thereafter be entitled
to purchase, at the Exercise Price resulting from such adjustment, the number
of shares of Common Stock obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment,
3.2 Adjustment of Exercise Price Upon issuance of Common Stock.
3.2.1 (A) If and whenever after the date hereof the Company
shall issue or sell any Common Stock for no consideration or for a
consideration per share less than the Exercise Price, then, forthwith upon such
issue or sale, the Exercise Price shall be reduced (but not increased, except
as otherwise specifically provided in Section 3.2.2(C) hereof), to the price
(calculated to the nearest one-ten thousandth of a cent) determined by dividing
(x) an amount equal to the sum of (i) the aggregate number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by then
existing Exercise Price plus (ii) the consideration received by the Company
upon such issue or sale by (y) the aggregate number of shares of Common Stock
outstanding immediately after such issue or sale.
(B) Notwithstanding the provisions of this
Section 3.2, no adjustment shall be made in the Exercise Price in the event
that the Company issues, in one or more transactions, (i) Common Stock or
convertible securities upon exercise of any options issued to officers,
directors or employees of the Company pursuant to a stock option plan or an
employment, severance or consulting agreement as now or hereafter in effect, in
each case approved by the Board of Directors (provided that
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the aggregate number of shares of Common Stock which may be issuable, including
options issued prior to the date hereof, under all such employee plans and
agreements shall at no time exceed the number of such shares of Common Stock
that are issuable under currently effective employee plans and agreements);
(ii) Common Stock upon exercise of the Warrants or any other warrant issued
pursuant to the terms of the Agreement or otherwise issued to the Holder; (iii)
Common Stock upon exercise of any stock purchase warrant or option (other than
the options referred to in clause (i) above) or other convertible security
outstanding on the date hereof; (iv) Common Stock upon conversion of the Note;
or (v) Common Stock issued as consideration in acquisitions. In addition, for
purposes of calculating any adjustment of the Exercise Price as provided in
this Section 3.2, all of the shares of Common Stock issuable pursuant to any of
the foregoing shall be assumed to be outstanding prior to the event causing
such adjustment to be made.
3.2.2 For purposes of this Section 3.2, the following
Sections 3.2.2(A) to 3.2.2(E) inclusive, shall be applicable:
(A) Issuance of Rights or Options. In case at any time
after the date hereof the Company shall in any manner grant (whether
directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or securities convertible into or
exchangeable for Common Stock (such convertible or exchangeable stock
or securities being herein called "Convertible Securities"), whether or
not such rights or options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per
share for which shares of Common Stock are issuable upon the exercise
of such rights or options or upon conversion or exchange of such
Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Company as consideration for the
granting of such rights or options, plus the minimum aggregate amount
of additional consideration, if any, payable to the Company upon the
exercise of such rights or options, or plus, in the case of such rights
or options that relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon the
conversion or exchange of all such Convertible Securities issuable upon
the exercise of such rights or options) shall be less than the Exercise
Price in effect as of the date of granting such rights or options, then
the total maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon conversion or exchange of
all such Convertible Securities issuable upon the exercise of such
rights or options shall be deemed to be outstanding as of the date of
the granting of such rights or options and to have been issued for such
price per share, with the effect on the Exercise Price specified in
Section 3.2.1 hereof. Except as provided in Section 3.2.2 hereof, no
further adjustment of the Exercise Price shall be made upon the actual
issuance of such Common Stock or of such Convertible Securities upon
exercise of such rights or options or upon the actual issuance of such
Common Stock upon conversion or exchange of such Convertible
Securities.
(B) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase
price provided for in any right or option referred to in Section
3.2.2, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
Section 3.2.2, or the rate at which any Convertible Securities
referred to in Section 3.2.2, are convertible into or exchangeable for
Common Stock shall change (other than under or by reason of provisions
designed to protect against dilution),
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the Exercise Price then in effect hereunder shall forthwith be
readjusted (increased or decreased, as the case may be) to the
Exercise Price that would have been in effect at such time had such
rights, options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially granted,
issued or sold. On the expiration of any such option or right referred
to in Section 3.2.2, or on the termination of any such right to
convert or exchange any such Convertible Securities referred to in
Section 3.2.2, the Exercise Price then in effect hereunder shall
forthwith be readjusted (increased or decreased, as the case may be)
to the Exercise Price that would have been in effect at the time of
such expiration or termination had such right, option or Convertible
Securities, to the extent outstanding immediately prior to such
expiration or termination, never been granted, issued or sold, and the
Common Stock issuable thereunder shall no longer be deemed to be
outstanding. If the purchase price provided for in Section 3.2.2 or
the rate at which any Convertible Securities referred to in Section
3.2.2 reduced at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in case of
the delivery of Common Stock upon the exercise of any such right or
option or upon conversion or exchange of any such Convertible
Securities, the Exercise Price then in effect hereunder shall, if not
already adjusted, forthwith be adjusted to such amount as would have
obtained had such right, option or Convertible Securities never been
issued as to such Common Stock and had adjustments been made upon the
issuance of the Common Stock delivered as aforesaid, but only if as a
result of such adjustment the Exercise Price then in effect hereunder
is thereby reduced.
(C) Consideration for Stock. In case at any time Common
Stock or Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities shall be issued or
sold for cash, the consideration therefor shall be deemed to be the
amount received by the Company therefor. In case at any time any
Common Stock, Convertible Securities or any rights or options to
purchase any such Common Stock or Convertible Securities shall be
issued or sold for consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed
to be the fair value of such consideration, as determined reasonably
and in good faith by the Board of Directors of the Company. In case at
any time any Common Stock, Convertible Securities or any rights or
options to purchase any Common Stock or Convertible Securities shall
be issued in connection with any merger or consolidation in which the
Company is the surviving corporation, the amount of consideration
received therefor shall be deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Company,
of such portion of the assets and business of the nonsurviving
corporation as such Board of Directors may determine to be
attributable to such Common Stock, Convertible Securities, rights or
options as the case may be. In case at any time any rights or options
to purchase any shares of Common Stock or Convertible Securities shall
be issued in connection with the issuance and sale of other securities
of the Company, together consisting of one integral transaction in
which no consideration is allocated to such rights or options by the
parties, such rights or options shall be deemed to have been issued
with consideration.
(D) Record Date. In the case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling
them (i) to receive a dividend or other distribution payable in Common
Stock or Convertible Securities, or (ii) to subscribe for or purchase
Common Stock or Convertible Securities, then such record date shall be
deemed to be the date of the issuance or sale of the Common Stock or
Convertible Securities deemed to have been issued or
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sold as a result of the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(E) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned directly
by the Company in treasury, and the disposition of any such shares
shall be considered an issuance or sale of Common Stock for the
purpose of this Section 3.2.
3.3 Stock Dividends. In case the Company shall declare a dividend
or make any other distribution upon any shares of the Company, payable in
Common Stock or Convertible Securities, any Common Stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
3.4 Stock Splits and Reverse Splits. In the event that the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to
such subdivision shall be proportionately reduced and the number of Warrant
Shares purchasable pursuant to this Warrant immediately prior to such
subdivision shall be proportionately increased, and conversely, in the event
that the outstanding shares of Common stock shall at any time be combined into
a smaller number of shares, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased and the number of Warrant
Shares purchasable upon the exercise of this Warrant immediately prior to such
combination shall be proportionately reduced. Except as provided in this
Section 3.4, no adjustment in the Exercise Price and no change in the number of
Warrant Shares purchasable shall be made under this Article III as a result of
or by reason of any such subdivision or combination.
3.5 Reorganizations and Asset Sales. If any capital reorganization
or reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that a holder of Common Stock of
the Company shall be entitled to receive capital stock, securities or assets
with respect to or in exchange for their shares, then the following provisions
shall apply:
3.5.1 As a condition of such reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer or
other disposition (except as otherwise provided below in this Section 3.5),
lawful and adequate provisions shall be made whereby the holder of Warrants
shall thereafter have the right to purchase and receive upon the terms and
conditions specified in this Warrant and in lieu of the Warrant Shares
immediately theretofore receivable upon the exercise of the rights represented
hereby, such shares of capital stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of Warrant Shares immediately theretofore
so receivable had such reorganization, reclassification, consolidation, merger,
share exchange or sale not taken place, and in any such case appropriate
provision reasonably satisfactory to such holder shall be made with respect to
the rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Exercise
Price and of the number of Warrant Shares receivable upon the exercise) shall
thereafter be applicable, as nearly as possible, in relation to any shares of
capital stock, securities or assets thereafter deliverable upon the exercise of
Warrants.
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3.5.2 In the event of a merger, share exchange or
consolidation of the Company with or into another Person as a result of which a
number of shares of common stock or its equivalent of the successor Person
greater or lesser than the number of shares of Common Stock outstanding
immediately prior to such merger, share exchange or consolidation are issuable
to holders of Common Stock, then the Exercise Price in effect immediately prior
to such merger, share exchange or consolidation shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of Common Stock.
3.5.3 The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor Person (if other
than the Company) resulting from such consolidation, share exchange or merger
or the Person purchasing or otherwise acquiring such assets shall have assumed
by written instrument executed and mailed or delivered to the holder hereof at
the last address of such holder appearing on the books of the Company the
obligation to deliver to such holder such shares of capital stock, securities
or assets as, in accordance with the foregoing provisions, such holder may be
entitled to receive, and all other liabilities and obligations of the Company
hereunder. Upon written request by the holder hereof, such successor Person
will issue a new Warrant revised to reflect the modifications in this Warrant
effected pursuant to this Section 3.5.
3.5.4 If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share exchange
or sale, transfer or other disposition of all or substantially all of the
Company's assets with the Person having made such offer or with any affiliate
of such Person, unless prior to the consummation of such consolidation,
merger, share exchange, sale, transfer or other disposition the holder hereof
shall have been given a reasonable opportunity to then elect to receive upon
the exercise of the Warrants either the capital stock, securities or assets
then issuable with respect to the Common Stock or the capital stock, securities
or assets, or the equivalent, issued to previous holders of the Common Stock in
accordance with such offer.
3.6 Adjustment for Asset-Distribution. If the Company declares a
dividend or other distribution payable to all holders of shares of Common Stock
in evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or rights thereto) or other property), the Exercise Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per
share of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
3.7 De Minimis Adjustments. No adjustment in the number of shares
of Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon an exercise of each Warrant and no adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least $0.01 in the Exercise Price; provided, however, that any
adjustments which by reason of this
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Section 3.7 are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations shall be made to the
nearest full share or nearest one hundredth of a dollar, as applicable.
3.8 Notice of Adjustment. Whenever the Exercise Price or the
number of Warrant Shares issuable upon the exercise of the Warrants shall be
adjusted as herein provided, or the rights of the holder hereof shall change by
reason of other events specified herein, the Company shall compute the adjusted
Exercise Price and the adjusted number of Warrant Shares in accordance with the
provisions hereof and shall prepare an Officer's Certificate setting forth the
adjusted Exercise Price and the adjusted number of Warrant Shares issuable upon
the exercise of the Warrants or specifying the other shares of stock,
securities or assets receivable as a result of such change in rights, and
showing in reasonable detail the facts and calculations upon which such
adjustments or other changes are based. The Company shall cause to be mailed to
the holder hereof copies of such Officer's Certificate together with a notice
stating that the Exercise Price and the number of Warrant Shares purchasable
upon exercise of the Warrants have been adjusted and setting forth the adjusted
Exercise Price and the adjusted number of Warrant Shares purchasable upon the
exercise of the Warrants.
3.9 Notifications to Holders. In case at any time the Company
proposes:
(i) to declare any dividend upon its Common Stock payable
in capital stock or make any special dividend or other distribution
(other than cash dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the
holders of its Common Stock any additional shares of capital stock of
any class or other rights;
(iii) to effect any capital reorganization, or
reclassification of the capital stock of the Company, or
consolidation, merger or share exchange of the Company with another
Person, or sale, transfer or other disposition of all or substantially
all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the holder
hereof (a) at least 10 days' (but not more than 90 days') prior written notice
of the date of which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of such issuance, reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, and (b) in the case of any such
issuance, reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
at least 10 days' (but not more than 90 days') prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution
or subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock, as the case may be, for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, as the case may be.
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3.10 Company to Prevent Dilution. If any event or condition occurs
as to which other provisions of this Article III are not strictly applicable or
if strictly applicable would not fairly protect the exercise or purchase rights
of the Warrants evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect
the exercise or purchase rights of the holder hereof under any provisions of
this Warrant, then the Company shall make such adjustments in the application
of such provisions, in accordance with such essential intent and principles, so
as to protect such exercise and purchase rights as aforesaid, and any
adjustments necessary with respect to the Exercise Price and the number of
Warrant Shares purchasable hereunder so as to preserve the rights of the holder
hereunder. In no event shall any such adjustment have the effect of increasing
the Exercise Price as otherwise determined pursuant to this Article III except
in the event of a combination of shares of the type contemplated in Section 3.4
hereof, and then in no event to an amount greater than the Exercise Price as
adjusted pursuant to Section 3.4 hereof.
ARTICLE IV
MISCELLANEOUS
4.1 Entire Agreement. This Warrant, together with the Agreement,
contain the entire agreement between the holder hereof and the Company with
respect to the Warrant Shares purchasable upon exercise hereof and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
4.2 Governing Law. This warrant shall be governed by and
construed in accordance with the laws of the State of Delaware.
4.3 Waiver and Amendment. Any term or provision of this Warrant
may be waived at any time by the party which is entitled to the benefits
thereof and any term or provision of this Warrant may be amended or
supplemented at any time by agreement of the holder hereof and the Company,
except that any waiver of any term or condition, or any amendment or
supplementation, of this Warrant shall be in writing. A waiver of any breach or
failure to enforce any of the terms or conditions of this Warrant shall not in
any way effect, limit or waive a party's rights hereunder at any time to
enforce strict compliance thereafter with every term or condition of this
Warrant.
4.4 Illegality. In the event that any one or more of the
provisions contained in this Warrant shall be determined to be invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provision exists, be in any way impaired.
4.5 Copy of Warrant. A copy of this Warrant shall be filed among
the records of the Company.
4.6 Notice. Any notice or other document required or permitted to
be given or delivered to the holder hereof shall be in writing and delivered
at, or sent by certified or registered mail to such holder at, the last address
shown on the books of the Company maintained at the Warrant Office for the
registration of this Warrant or at any more recent address of which the holder
hereof shall have notified the Company in writing. Any notice or other document
required or permitted to be given or delivered to the Company, other than such
notice or documents required to be delivered to the Warrant Office,
11
<PAGE> 12
shall be delivered at, or sent by certified or registered mail to, the offices
of the Company at 3200 Wilcrest Drive, Suite 440 Houston, Texas 77042 or such
other address within the continental United States of America as shall have
been furnished by the Company to the holder of this Warrant.
4.7 Limitation of Liability; Not Stockholders. No provision of
this Warrant shall be construed as conferring upon the holder hereof the right
to vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election of
directors of the Company or any other matter whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the
holder hereof to purchase shares of Common Stock, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the purchase price of any shares of Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
4.8 Exchange. Loss, Destruction, etc. of Warrant. Upon receipt of
evidence satisfactory to the Company of the loss, theft, mutilation or
destruction of this Warrant, and in the case of any such loss, theft or
destruction upon delivery of a bond of indemnity or such other security in such
form and amount as shall be reasonably satisfactory to the Company, or in the
event of such mutilation upon surrender and cancellation of this Warrant, the
Company will make and deliver a new Warrant of like tenor, in lieu of such
lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the
provisions of this Section 4.8 in lieu of any Warrant alleged to be lost,
destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an
original contractual obligation on the part of the Company. This Warrant shall
be promptly canceled by the Company upon the surrender hereof in connection
with any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of Warrants
pursuant to this Section 4.8.
4.9 Registration Rights. The Warrant Shares shall be entitled to
such registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
4.10 Headings. The Article and Section and other headings herein are
for convenience only and are not a part of this Warrant and shall not affect
the interpretation thereof.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed in its name.
Dated: January 24, 1997
ACR GROUP, INC.
By: /s/ ALEX TREVINO, JR.
----------------------------------
Alex Trevino, Jr., President
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<PAGE> 1
EXHIBIT 10.18
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Registration Rights
Agreement") is made as of January 24, 1997, by and between ACR Group, Inc., a
Texas corporation (the "Company"), and St. James Capital Partners, L.P., a
Delaware limited partnership ("Purchaser").
WHEREAS, on the date hereof, Purchaser acquired from the Company a 10%
Convertible Promissory Note (the "Note") in the original principal amount of
$1,400,000, which is convertible into a number of shares as set forth in the
Note (the "Note Shares") of the Company's common stock, $.01 par value (the
"Common Stock");
WHEREAS, on the date hereof, Purchaser received from the Company
Warrants to Purchase Common Stock (the "Warrants") which may be exercised to
acquire a certain number of shares of Common Stock, subject to adjustment (the
"Warrant Shares"; the Note Shares and the Warrant Shares are collectively
referred to as the "Shares");
WHEREAS, the Company wishes to grant Purchaser certain registration
rights in respect of the Shares, as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth below:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Purchaser" shall mean St. James Capital Partners, L.P., a Delaware
limited partnership.
"Registrable Securities" shall mean (i) the Shares; and (ii) any
Common Stock issued or issuable at any time or from time to time in respect of
the Shares upon a stock split, stock dividend, recapitalization or other
similar event involving the Company.
The terms "register", "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering by the
Commission of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, other than Selling
Expenses (as defined below), incurred by the Company in complying with this
Registration Rights Agreement, including, without limitation, all registration,
qualification and filing fees, exchange listing fees, printing expenses, escrow
fees, fees and disbursements of counsel for the Company, blue sky fees and
expenses, the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company).
<PAGE> 2
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the holders of the Registrable Securities and, except as set forth above, all
fees and disbursements of counsel for such holders.
"Underwritten Public Offering" shall mean a public offering in which
the Common Stock is offered and sold on a firm commitment basis through one or
more underwriters, all pursuant to (i) an effective registration statement
under the Securities Act and (ii) an underwriting agreement between the Company
and such underwriters.
ARTICLE II
REGISTRATION RIGHTS
2.1 Demand Registration.
2.1.1 At anytime and from time to time, a holder or holders of
Registrable Securities holding in the aggregate at least 50% of the then
existing Registrable Securities may make a one-time written demand upon the
Company, to file, within 60 days after such written demand is made, with the
Securities and Exchange Commission a shelf registration statement covering the
resale of the Registrable Securities on Form S-1, S-2 or S-3 (the "Registration
Statement"). The Company shall use its reasonable best efforts to cause such
Registration Statement to become effective as soon as practicable and to cause
the Registrable Securities to be qualified in such state jurisdictions as the
holders may request.
2.1.2 Except as set forth herein, the Company shall take
all reasonable steps necessary to keep the Registration Statement current and
effective until the lesser of: (i) three years and (ii) until the Registrable
Securities are transferable pursuant to Rule 144 under the Securities Act
without the volume limitations set forth in such rule.
2.1.3 The Company shall be entitled to require that a
holder or holders of Registrable Securities refrain from effecting any public
sales or distributions of the Registrable Securities pursuant to a Registration
Statement that has been declared effective by the Commission or otherwise, if
the board of directors of the Company reasonably determines that such public
sales or distributions would interfere in any material respect with any
transaction involving the Company that the board of directors reasonably
determines to be material to the Company. The board of directors shall, as
promptly as practicable, give the holders of the Registrable Securities written
notice of any such development. In the event of a request by the board of
directors of the Company that the holders of Registrable Securities refrain
from effecting any public sales or distributions of the Registrable Securities,
the Company shall be required to lift such restrictions regarding effecting
public sales or distributions of the Registrable Securities as soon as
reasonably practicable after the board of directors shall reasonably determine
public sales or distributions by the holders of the Registrable Securities
shall not interfere with such transaction, provided, that in no event shall any
requirement that the holders of Registrable Securities refrain from effecting
public sales or distributions in the Registrable Securities extend for more
than 90 days.
2.2 Piggyback Registration.
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2.2.1 Subject to the terms hereof, if at any time or from
time to time the Company or any shareholder of the Company shall determine to
register any of its securities (except for registration statements relating to
employee benefit plans or exchange offers), either for its own account or the
account of a security holder, the Company will promptly give to the holders of
Registrable Securities written notice thereof no less the 30 days prior to the
filing of any registration statement; and include in such registration (and any
related qualification under blue sky laws or other compliance), and in the
underwriting involved therein, if any, such Registrable Securities as such
holders may request in a writing delivered to the Company within 20 days after
the holders' receipt of Company's written notice.
2.2.2 The holders of Registrable Securities may participate
in any number of registrations until all of the Shares held by holders of
Registrable Securities have been distributed pursuant to a registration or
until the Shares are transferable pursuant to Rule 144 under the Securities
Act.
2.2.3 If any registration statement is an Underwritten Public
Offering, the right of holders of Registrable Securities to registration
pursuant to this Section shall be conditioned upon each such holder's
participation in such reasonable underwriting arrangements as the Company shall
make regarding the offering, and the inclusion of Registrable Securities in the
underwriting shall be limited to the extent provided herein. Holders of
Registrable Securities and all other shareholders proposing to distribute their
securities through such underwriting shall (together with the Company and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter concludes in its
reasonable judgment that the number of shares to be registered for selling
shareholders (including the holders of Registrable Securities) would materially
adversely effect such offering, the number of Shares to be registered, together
with the number of shares of Common Stock or other securities held by other
shareholders proposed to be registered in such offering, shall be reduced on a
pro rata basis based on the number of Shares proposed to be sold by the holders
of Registrable Securities as compared to the number of shares proposed to be
sold by all shareholders. If any holder of Registrable Securities disapproves of
the terms of any such underwriting, it may elect to withdraw therefrom by
written notice to the Company and the managing underwriter, delivered not less
than 10 days before the effective date. The Registrable Securities excluded by
the managing underwriter or withdrawn from such underwriting shall be withdrawn
from such registration, and shall not be transferred in a public distribution
prior to 120 days after the effective date of the registration statement
relating thereto, or such other shorter period of time as the underwriters may
require.
2.2.4 The Company shall have the right to terminate or
withdraw any registration initiated by it under this Section prior to the
effectiveness of such registration whether or not the holders of Registrable
Securities have elected to include securities in such registration.
2.3 Expenses of Registration. All Registration Expenses shall be
borne by the Company. Unless otherwise stated herein, all Selling Expenses
relating to securities registered on behalf of the holders of Registrable
Securities shall be borne by the holders of Registrable Securities.
2.4 Best Registration Rights. If, on or after the date of this
Registration Rights Agreement, the Company grants to any person with respect to
any security issued by the Company or any of its Subsidiaries registration
rights that provide for terms that are in any manner more favorable to the
holder of such registration rights than the terms granted to the Purchaser (or
if the Company amends or waives any provision of any Agreement providing
registration rights of others or takes any other action
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<PAGE> 4
whatsoever to provide for terms that are more favorable to other holders than
the terms provided to the Purchaser) then this Registration Rights Agreement
shall immediately be deemed amended to provide the holders of Registrable
Securities with any (or all) of such more favorable terms as the holders of
Registrable Securities shall elect to include herein.
2.5 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep the holders of Registrable
Securities advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. At its expense,
the Company will:
2.5.1 Prepare and file with the Commission a registration
statement with respect to such securities and use its commercially reasonable
efforts to cause such registration statement to become and remain effective
until the distribution described in such registration statement has been
completed;
2.5.2 Furnish to each underwriter such number of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such
underwriter may reasonably request in order to facilitate the public sale of
the shares by such underwriter, and promptly furnish to each underwriter and
the holders of Registrable Securities notice of any stop-order or similar
notice issued by the Commission or any state agency charged with the regulation
of securities, and notice of any Nasdaq or securities exchange listing; and
2.5.3 Cause the Shares to be listed on the Nasdaq small-cap
market or a securities exchange on which the Common Stock is approved for
listing.
2.6 Indemnification.
2.6.1 To the extent permitted by law, the Company will
indemnify each holder of Registrable Securities, each of its officers and
directors and partners, and each person controlling such holder within the
meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, to the extent such expenses, claims,
losses, damages or liabilities arise out of or are based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other similar
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of the
Securities Act or any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each holder of
Registrable Securities, each of its officers and directors and partners, and
each person controlling each holder of Registrable Securities, each such
underwriter and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action;
provided, however, that the indemnity contained herein shall not apply to
amounts paid in settlement of any claim, loss, damage, liability or expense if
settlement is effected without the consent of the Company (which consent shall
not unreasonably be withheld); provided, further, that the Company will not be
liable in any
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<PAGE> 5
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by a holder of Registrable Securities,
such controlling person or such underwriter specifically for use therein.
Notwithstanding the foregoing, insofar as the foregoing indemnity relates to
any such untrue statement (or alleged untrue statement) or omission (or alleged
omission) made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the Commission at the time the registration
statement becomes effective or in the final prospectus filed with the
Commission pursuant to the applicable rules of the Commission or in any
supplement or addendum thereto, the indemnity agreement herein shall not inure
to the benefit of any underwriter if a copy of the final prospectus filed
pursuant to such rules, together with all supplements and addenda thereto, was
not furnished to the person or entity asserting the loss, liability, claim or
damage at or prior to the time such furnishing is required by the Securities
Act.
2.6.2 To the extent permitted by law, each holder of
Registrable Securities will, if securities held by such holder are included in
the securities as to which such registration, qualification or compliance is
being effected pursuant to terms hereof, indemnify the Company, each of its
directors and officers, each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the Securities Act, and
each other person selling the Company's securities covered by such registration
statement, each of such person's officers and directors and each person
controlling such persons within the meaning of Section 15 of the Securities
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by a
holder of Registrable Securities of any rule or regulation promulgated under
the Securities Act applicable to holders of Registrable Securities and relating
to action or inaction required of holders of Registrable Securities in
connection with any such registration, qualification or compliance, and will
reimburse the Company, such other persons, such directors, officers, persons,
underwriters or control persons for any legal or other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by such holder of Registrable
Securities specifically for use therein; provided, however, that the indemnity
contained herein shall not apply to amounts paid in settlement of any claim,
loss, damage, liability or expense if settlement is effected without the
consent of such holder of Registrable Securities (which consent shall not be
unreasonably withheld). Notwithstanding the foregoing, the liability of such
holder of Registrable Securities under this subsection (b) shall be limited in
an amount equal to the net proceeds from the sale of the shares sold by such
holder of Registrable Securities, unless such liability arises out of or is
based on willful conduct by such holder of Registrable Securities. In addition,
insofar as the foregoing indemnity relates to any such untrue statement (or
alleged untrue statement) or omission (or alleged omission) made in the
preliminary prospectus but eliminated or remedied in the amended prospectus on
file with the Commission at the time the registration statement becomes
effective or in the final prospectus filed pursuant to applicable rules of the
Commission or in any supplement or addendum thereto, the indemnity agreement
herein shall not inure to the benefit of the Company or any underwriter, if a
copy of the final prospectus filed pursuant to such rules, together with all
supplements and addenda thereto, was not furnished to the person or entity
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<PAGE> 6
asserting the loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act.
2.6.3 Notwithstanding the foregoing paragraphs (a) and (b)
of this Section, each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or as to which the
Indemnifying Party is asserting separate or different defenses, which defenses
are inconsistent with the defenses of the Indemnified Party. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation. No Indemnified Party
shall consent to entry of any judgment or enter into any settlement without the
consent of each Indemnifying Party.
2.6.4 If the indemnification provided for in this Section
is unavailable to an Indemnified Party in respect of any losses, claims,
damages or liabilities referred to therein, then each Indemnifying Party, in
lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and all shareholders
offering securities in the offering (the "Selling Security Holders") on the
other from the offering of the Company's securities, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and the Selling Security Holders on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Selling
Security Holders on the other shall be the net proceeds from the offering
(before deducting expenses) received by the Company on the one hand and the
Selling Security Holders on the other. The relative fault of the Company on the
one hand and the Selling Security Holders on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the Selling
Security Holders and the parties' relevant intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Selling Security Holders agree that it would not be just
and equitable if contribution pursuant to this Section were based solely upon
the number of entities from whom contribution was requested or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section. The amount paid or payable by
an Indemnified Party as a result of the losses, claims, damages and liabilities
referred to above in this Section shall be deemed to include any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim, subject to the provisions
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hereof. Notwithstanding the provisions of this Section, no Selling Shareholder
shall be required to contribute any amount or make any other payments under
this Agreement which in the aggregate exceed the proceeds received by such
Selling Shareholder. No person guilty of fraudulent misrepresentation (within
the meaning of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
2.7 Certain Information.
2.7.1 The holders of Registrable Securities agree, with
respect to any Registrable Securities included in any registration, to furnish
to the Company such information regarding such holder, the Registrable
Securities and the distribution proposed by the such holder as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to herein.
2.7.2 The failure of the holder of Registrable Securities
to furnish the information requested pursuant to Section 2.7.1 shall not affect
the obligation of the Company to the other Selling Security Holders who furnish
such information unless, in the reasonable opinion of counsel to the Company or
the underwriters, such failure impairs or may impair the legality of the
Registration Statement or the underlying offering.
2.8 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of Restricted Securities (used herein as defined in Rule
144 under the Securities Act) to the public without registration, the Company
agrees to use its best lawful efforts to:
2.8.1 Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times during which the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act");
2.8.2 File with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act
and the Exchange Act (at all times during which the Company is subject to such
reporting requirements); and
2.8.3 So long as any holder of Registrable Securities owns
any Restricted Securities (as defined in Rule 144 promulgated under the
Securities Act), to furnish to such holder forthwith upon request a written
statement by the Company as to its compliance with the reporting requirements
of said Rule 144 and with regard to the Securities Act and the Exchange Act (at
all times during which the Company is subject to such reporting requirements),
a copy of the most recent annual or quarterly report of the Company, and such
other reports and documents of the Company and other information in the
possession of or reasonably obtainable by the Company as such holder of
Registrable Securities may reasonably request in availing itself of any rule or
regulation of the Commission allowing such holder to sell any such securities
without registration.
2.9 Transferability. The rights conferred by this Agreement shall
be freely transferable to a recipient of Registrable Securities.
2.10 Governing Law. This Agreement shall be governed in all respects
by the laws of the State of Delaware.
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2.11 Entire Agreement, Amendment. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subject hereof. This Agreement, or any provision hereof, may be amended,
waived, discharged or terminated upon the written consent of the Company and
the Purchaser.
2.12 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger
including Federal Express or similar courier service, addressed (a) if to the
Purchaser: St. James Capital Partners, L.P., c/o St. James Capital Corp., 1980
Post Oak Boulevard, Suite 2030, Houston, Texas 77056, or at such other address
as the Purchaser shall have furnished to the Company in writing, or (b) if to
the Company: to ACR Group, Inc., 3200 Wilcrest Drive, Suite 440, Houston, Texas
77042, or at such other address as the Company shall have furnished to the
Purchaser. Each such notice or other communication shall for all purposes of
this Agreement be treated as effective upon receipt.
2.13 Delays or Omissions. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to any party
to this Agreement shall impair any such right, power or remedy of such party
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party of any provisions or conditions of this agreement, must be in
writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party to this Agreement, shall be cumulative and not
alternative.
2.14 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
2.15 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision.
2.16 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
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THE COMPANY'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Company has executed this agreement effective
upon the date first set forth above.
ACR GROUP, INC.
By: /s/ ALEX TREVINO JR.
--------------------------------
Alex Trevino, Jr., President
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<PAGE> 10
THE PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Purchaser has signed this Agreement as of the
date first written above.
ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp.,
its General Partner
/s/ JOHN L. THOMPSON
-------------------------------
John L. Thompson, President
-10-
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EXHIBIT 10.19
[NATIONSBANK LETTERHEAD]
May 12,1997
Mr. Anthony R. Maresca
Senior Vice President
ACR Group, Inc.
3200 Wilcrest Drive, Suite 440
Houston, Texas 77042
Re: NationsBank of Texas, N.A. ("Lender") re: Credit facility for ACR
Group, and Subsidiaries
Dear Tony:
We are pleased to advise you that we have obtained credit approval for a credit
facilities for each of ACR Group, Inc., ACR Supply, Inc., Heating and Cooling
Supply, Inc., Total Supply, Inc., Valley Supply, Inc., Ener-Tech, Inc., Florida
Cooling Supply, Inc., and Lifetime Filters, Inc., in an aggregate amount up to
$18,000,000, subject to the terms and conditions summarized below:
BORROWER: ACR Group, Inc. ("ACR") and each of its subsidiaries, ACR
Supply, Inc., Heating and Cooling Supply, Inc., Total Supply,
Inc., Valley Supply, Inc., Ener-Tech Inc., Florida Cooling
Supply, Inc., and Lifetime Filters, Inc. (ACR and the above
named subsidiaries hereinafter each a "Borrower" and
collectively "Borrowers")
FACILITY: Credit Limit: Aggregate $18,000,000.00 revolving credit
facilities (collectively the "Facility"), including
$1,000,000.00 sub-facility for letters of credit available for
use by any, Borrower, subject to its respective eligible
collateral availability, provided that the aggregate amount
outstanding to all Borrowers under the Facility at any time
shall not exceed $18,000,000.00. See "Loan Availability" and
"Letters of Credit" below.
PURPOSE: Refinance of certain existing debt owing to Lender, working
capital, issuance of letters of credit and acquisitions.
LOAN
AVAILABILITY: Advances to each Borrower under the Facility will be limited
to the sum of (a) 85% of eligible accounts of such Borrower,
plus (b) 50% of eligible inventory, of such Borrower (provided
that the aggregate amount available for borrowing under the
Facility under this clause (b) shall not exceed
$9,000,000.00). Standards and determination of eligibility,
and applicable reserves from eligibility, shall be established
from time to time in the discretion of Lender.
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ACR Group, Inc.
May 12, 1997
Page 2
SECURITY: All obligations and indebtedness from time to time owing under
the Facility shall be secured by first, prior and exclusive
security interests in all accounts, inventory, documents,
chattel paper, instruments, deposit accounts, contract rights
and general intangibles now owned or hereafter acquired by
each Borrower, and any and all proceeds thereof, as more
particularly described in the governing credit agreements
evidencing the Facility. All collateral will
cross-collateralize all obligations owing by each Borrower to
Lender.
LETTERS OF
CREDIT: The Facility may be utilized by any Borrower to support the
issuance of letters of credit, subject to availability of
eligible collateral of such Borrower, up to the aggregate
maximum unfunded face amount at any time outstanding for the
account of all Borrowers of $1,000,000.00. Each letter of
credit shall be supported by a duly executed letter of credit
application and reimbursement agreement in form satisfactory
to Lender. The amount, if any, from time to time funded by
Lender under any such letters of credit shall be payable on
demand, or at Lender's option, charged as a loan under the
Facility in favor of the Borrower for whose account such
letter of credit was issued. The aggregate amount from time to
time outstanding for the account of any Borrower under letters
of credit shall be added to the amount outstanding so such
Borrower under the Facility for purposes of determining unused
availability under the Facility.
MATURITY: Initial term of three (3) years, automatically extending for
one year periods thereafter (subject to continued credit
approval), each extending through the day preceding each
successive the anniversary of the expiration of such initial
term, unless notice of termination is provided by either party
at least sixty (60) days prior to any such anniversary date.
In the event that the Facility is terminated other than at the
end of the initial term in or any extended term, Borrowers
shall pay to Lender, as liquidated damages resulting from such
termination, an amount equal to the following applicable
percentage of the aggregate credit limit under the Facility:
(i) three percent (3.0%) if such termination occurs during the
first year following closing; (ii) two percent (2.0%) if such
termination occurs during the second year following closing;
and (iii) one percent (1%) at any time thereafter.
INTEREST RATE: At Borrowers' option: (i) Lender's Prime Rate (as defined in
the governing credit agreements) plus one half of one percent
(0.50%) and/or (ii) LIBOR (as defined and adjusted in the
governing edit agreements) plus three percent (3.00%) (subject
to applicable maximum legal interest rates). Changes in the
applicable rate of interest based on
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ACR Group, Inc.
May 12, 1997
Page 3
the Prime Rate would be effective as of the first day of the
month following any change in the Prime Rate. Interest would
be calculated on the basis of a year of 360 days, subject to
applicable maximum legal interest rates. In order to reimburse
Lender for the cost of delays the collection and clearance of
remittances applied to the loan, accrued interest would be
calculated as if each such remittance had been received two
business days subsequent to its actual receipt.
CLOSING
FEE: At closing, in consideration for establishing the Facility
and Lender's commitment thereunder, Borrowers shall pay to
Lender a commitment fee of $70,000.00 at the time of execution
and delivery of definitive credit agreements establishing the
Facility (payment thereof to be allocated among each Borrower
as determined by Borrowers in a manner which is acceptable to
Lender). Such fee shall be deemed earned when payable and
shall be non-refundable.
ADMINISTRATION &
FIELD EXAMINATION
FEE: In consideration for Lender's administration of the Facility,
Borrowers shall pay to Lender a quarterly fee of $4,200 to
cover field examinations and other costs associated with the
administration of the Facility, payable quarterly in arrears
(payment thereof to be allocated among each Borrower as
determined by Borrowers in a manner which is acceptable to
Lender).
LETTER OF CREDIT
FEE: The greater of one and one-half percent (1.50%) per annum for
standby letters of credit or Lender's minimum issuance fee.
COVENANTS: The following covenants in respect of financial position shall
apply, in each case determined on a consolidated basis for
ACR and its consolidated subsidiaries (financial covenant
terms to be defined in the governing credit agreements
evidencing the Facility:)
Leverage Ratio: Maximum ratio of total liabilities less
subordinated debt to tangible net worth plus subordinated debt
of 6.5 to 1.0. Step-down in the ratio to be mutually agreed
upon.
Tangible Net Worth. Tangible net worth to be determined.
Annual step-up provision equal to fifty percent (50%) of net
income after taxes.
Fixed Charge Coverage Ratio. A minimum fixed charge coverage
ratio of at least 1.1 to 1, measured as of the end of each
calendar month based on rolling previous twelve (12) months of
operations.
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ACR Group, Inc.
May 12,1997
Page 4
Minimum Availability. Minimum availability of at least
$200,000 during the period of each fiscal year comprised by
the calendar months of December through February.
Capital expenditures. Maximum amount of $250,000 annually.
Net Income. Net Income shall not be less than $0.00 for any
period of more than three consecutive calendar months.
OTHER TERMS: Except as otherwise agreed by Lender:
1. Borrowers shall provide Lender with the following
reporting (for ACR and its consolidated subsidiaries):
a. Monthly consolidated and consolidating
financial statements, prepared in conformance with
generally accepted accounting principles, within 30
days of the end of each calendar month, accompanied
by a certification from each Borrower evidencing
compliance with all representations, warranties, and
covenants contained in the governing credit
agreements.
b. Annual audited financial statements
(consolidated and consolidating), prepared in
conformance with generally accepted accounting
principles, within 120 days after the end of each
fiscal year, accompanied by a certification from each
Borrower evidencing compliance with all
representations, warranties, and covenants contained
in the governing credit agreements.
c. Collateral and borrowing base reports by each
Borrower, as requested.
d. Monthly certificate confirming compliance
with all covenants and requirements under the
governing credit agreements, signed by an officer of
each Borrower.
e. Accounts receivable aging report and
inventory report for each Borrower, in form
satisfactory to Lender, within 30 days after the end
of each calendar month.
2. Borrowers' accounting policies and practices shall
conform to generally accepted accounting principles. Each
Borrower shall keep and maintain proper, complete and
consistent books of record and account respecting its
operations, affairs and financial condition and shall permit
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ACR Group, Inc.
May 12, 1997
Page 5
Lender from time to time, by and through its authorized
agents, to visit and inspect any of it properties, inspect and
copy its books and records, and discuss its affairs, finances,
accounts, and operations with its officers.
3. On and after the date of initial funding, all
remittances to each Borrower in payment of accounts will be
directed to Lender, for collection and application (on a
periodic basis acceptable to Borrowers and Lender) in
reduction of the loan balance of such Borrower under the
Facility.
4. Each Borrower will maintain and preserve its
corporate existence and all rights, privileges, franchises and
other authority for the conduct of its business.
5. Each Borrower will maintain its properties and
facilities in good order and repair.
6. Borrowers will maintain insurance with responsible
insurance carriers against such risks and in such amounts as
is customary for similar businesses, naming Lender as loss
payee, in form satisfactory to Lender.
7. Borrowers will pay and discharge all taxes,
assessments and governmental charges in a timely manner,
except those being contested in good faith with adequate
reserves satisfactory to Lender.
8. Borrowers will provide Lender with annual projections
of each Borrower's anticipated financial performance for the
succeeding year.
9. Borrowers shall furnish waivers from all landlords,
mortgagees or other third party potential lien claimants as
may be requested by Lender with respect to each premises where
any of Lender's collateral is located, which shall be in form
satisfactory to Lender.
10. The governing credit agreements will specify
customary events of default and remedies as may be required
by Lender. All obligations from time to time owing to Lender
by Borrowers shall be cross-defaulted.
11. The governing credit agreements and all related legal
documentation will be governed by the laws of the State of
Texas.
12. Borrowers will reimburse Lender for all costs and
expenses, including without limitation, attorney's fees and
other out-of-pocket
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ACR Group, Inc.
May 12, 1997
Page 6
costs, incurred in connection with the governing agreements
evidencing the Facility and the ongoing administration or
enforcement of the Facility.
CONDITIONS
FOR CLOSING: 1. Borrowers will execute and deliver all definitive
legal documentation relative to the Facility as may be
required by Lender. All legal documentation in respect of the
Facility shall be acceptable to Lender in its sole discretion.
Such legal documentation shall contain conditions, covenants
and other provisions (in addition to those specified above)
customary for credit facilities of this type including,
without limitation, conditions for funding and provisions
addressing: (i) litigation, claims and contingent liabilities,
(ii) incurrence of other indebtedness, lease obligations or
contingent liabilities, (iii) investments, (iv) transactions
with affiliates, (v) subordination of obligations owing to
affiliates, (vi) payment of subordinated debt, (vii) material
change in management or ownership, (viii) merger or
consolidation, (ix) repurchase or redemption of capital stock,
(x) liens on assets, (xi) dividends, (xii) acquisitions,
(xiii) compliance with applicable laws, and other provisions
customary for similar credit facilities as Lender shall
require. Lender will require an acceptable opinion of counsel
for Borrowers, addressing such matters as Lender may
designate.
2. There is no material adverse change in the financial
condition, assets, liabilities, business, results of
operations or projected operations of any Borrower, or of
Borrowers taken as a whole, since the effective date of the
last financial statements and other financial and operating
information submitted to Lender, such determination to be made
according to Lender's subjective opinion in its discretion.
3. Lender shall complete a field audit of Borrowers'
operations, the results of which shall be satisfactory to
Lender.
4. Lender shall obtain a copy of Borrowers' audited
financial statement for the fiscal year ended February 28,
1997, which shall reflect no material adverse change relative
to the draft copy thereof delivered to Lender by Borrowers.
5. Confirmation to Lender that each Borrower is a
corporation duly formed and validly existing and presentation
of documentation regarding authority to act and authorization
of the transaction and all documentation.
6. Evidence of insurance in compliance with the
requirements of this commitment.
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ACR Group, Inc.
May 12, 1997
Page 7
7. Lender shall confirm to its satisfaction the absence
of other liens or security interests on the collateral.
8. Verification by Lender of Lender's first priority
security interest and lien in all collateral.
9. Payment to Lender of all expenses and costs,
including without limitation, reasonable fees and costs of
Lender's counsel, incurred by Lender in connection with
preparation of this letter and documenting and establishing
the Facility.
10. The accomplishment of all requirements and conditions
stated in this letter.
The foregoing is intended to provide a substantive outline of the Facility and
is not intended as a complete statement of all terms, conditions and documents
that will be required in connection with the transaction. Our approval is
expressly conditioned upon the satisfaction of Lender in its discretion of all
legal documentation and the furnishing by Borrowers to Lender of such
documentation, information, certifications and opinions as Lender may request
in connection with establishing the Facility. It is expressly understood that
such legal documentation, when executed by Borrowers and Lender, shall
constitute the final and complete agreement between Lender and Borrowers
regarding the subject matter hereof and shall supersede all of the provisions
hereof. Nothing contained in this letter shall alter, amend, change or modify
such loan documents, nor shall anything contained herein be construed as an
agreement or commitment except as specifically provided herein. This approval
may be withdrawn by Lender at any time if Lender discovers that any material
misrepresentations have been made to Lender by any Borrower, or if any material
facts come to our attention which we reasonably believe adversely affects our
evaluation of the collateral or of any Borrower, or of Borrowers as a whole, or
of the creditworthiness, financial condition or operations of any Borrower, or
of Borrowers as a whole.
We are pleased to have the opportunity to work with you to complete this
financing. Please indicate your acceptance of this letter by signing and
returning the enclosed copy on or before 5:00 p.m., May 15, 1997, together with
your check in the amount of $15,000.00 as a deposit against costs, expenses and
professional fees incurred by Lender in connection with the Facilities, at
which time, if not accepted, this confirmation approval will automatically
terminate without notice and be of no further effect. Further, after such
acceptance in the event this Facility is not consummated on or before July 15,
1997 this approval confirmation shall automatically terminate without notice
unless extended by mutual agreement in writing. By accepting this letter,
Borrowers agree to pay all out-of-pocket costs and expenses incurred by Lender
in connection with preparations to establish the Facility, including, without
limitation, reasonable at attorneys' fees and costs in preparation of this
letter and preparation of documentation and closing, and all other costs
incurred in connection therewith, whether or not the Facility is consummated.
This letter is intended for you only and may not be relied upon by any third
party.
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ACR Group, Inc.
May 12, 1997
Page 8
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
Sincerely,
NATIONSBANK OF TEXAS, N.A.
By:/s/ CATHY BARROW
- ---------------------------
Cathy Barrow
Vice President
ACCEPTED this 13th day of May, 1997.
ACR GROUP, INC.
By: /s/ ANTHONY R. MARESCA
- ---------------------------
Name: Anthony R. Maresca
- ---------------------------
Title: Sr. Vice President
- ---------------------------
cc: Jim Recer
<PAGE> 9
[NationsBank Letterhead]
June 10, 1997
Mr. Anthony R. Maresca
Senior Vice President
ACR Group, Inc.
3200 Wilcrest Drive, Suite 440
Houston, Texas 77042
RE: Amendment to Letter of May 12, 1997 concerning Credit Facility for ACR
Group, Inc. and Subsidiaries
Dear Tony:
As clarification of Condition 2 of the Conditions of Closing and in accordance
with our discussions, Lender hereby defines material adverse change as a decline
in the consolidated shareholder's equity of more than $150,000.
Please call me if you have any questions.
Sincerely,
/s/ CATHY BARLOW
Cathy Barlow
Vice President
cc: Dora Martinez
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The companies listed below are all of the subsidiaries of ACR Group, Inc. as of
February 28, 1997. All of the companies are wholly-owned.
Name of Subsidiary State of Incorporation
------------------ ----------------------
ACR Supply, Inc. Texas
Total Supply, Inc. Texas
Valley Supply, Inc. Texas
Heating and Cooling Supply, Inc. Nevada
Time Energy Systems Southwest, Inc. Texas
Ener-Tech Industries, Inc. Tennessee
Florida Cooling Supply, Inc. Texas
West Coast HVAC Supply, Inc. Texas
Lifetime Filter, Inc. Texas
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No.333-16325) pertaining to the 1996 Stock Option Plan of ACR Group,
Inc., of our report dated June 10, 1997, with respect to the consolidated
financial statements and schedule of ACR Group, Inc. included in the Annual
Report (Form 10-K) for the year ended February 28, 1997, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Houston, Texas
June 10, 1997
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 412,699
<SECURITIES> 0
<RECEIVABLES> 9,498,957
<ALLOWANCES> 584,024
<INVENTORY> 13,667,019
<CURRENT-ASSETS> 23,471,793
<PP&E> 5,338,516
<DEPRECIATION> 1,903,110
<TOTAL-ASSETS> 30,557,610
<CURRENT-LIABILITIES> 12,391,718
<BONDS> 0
0
0
<COMMON> 103,716
<OTHER-SE> 6,902,284
<TOTAL-LIABILITY-AND-EQUITY> 30,557,610
<SALES> 78,371,020
<TOTAL-REVENUES> 78,371,020
<CGS> 63,285,694
<TOTAL-COSTS> 63,285,694
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 252,572
<INTEREST-EXPENSE> 925,409
<INCOME-PRETAX> 886,503
<INCOME-TAX> 258,285
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,144,788
<EPS-PRIMARY> .11
<EPS-DILUTED> .10
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