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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
For Annual Reports Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
February 28, 1998 0-12490
ACR GROUP, INC.
(Exact name of registrant as specified in its Charter)
Texas 74-2008473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Wilcrest Drive, Suite 440, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 780-8532
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the common stock held by nonaffiliates
of the registrant on April 30, 1998 was $19,883,970. 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, 1998: 10,634,017 shares
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in August 1998 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 10
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 19
Item 8. Financial Statements and Supplementary
Data 20
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 43
PART III
Item 10. Directors and Executive Officers of the
Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial
Owners and Management 43
Item 13. Certain Relationships and Related
Transactions 43
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 44
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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 eight
additional HVACR distribution companies and now has 34 branch operations in
nine states. The Company plans to continue expanding in the Sunbelt of the
United States and in other geographic areas with a high rate of economic
growth, 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 provide a cushion
against economic swings. The aftermarket is far less susceptible to changes in
economic conditions than the new construction market and now represents
approximately 70% of all units installed annually. This percentage should
continue to increase as the base of installed systems expands. Much of the
HVACR industry is also seasonal; sales of air conditioning and heating systems
are generally largest during the times of the year when climatic conditions
require the greatest use of such systems. Sales of refrigeration systems, which
are generally to commercial customers, are subject to less seasonality.
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 thirteen 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.
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ACRS sells primarily to licensed contractors serving the residential
and light commercial (restaurants, strip shopping centers, etc.)
markets. The company's sales mix is approximately 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 1998.
Total Supply, Inc.
In 1990, the Company organized Total Supply, Inc. ("TSI") to fabricate
air conditioning ductwork out of fiber glass ductboard, and in 1992
converted the company's business to HVACR wholesale distribution.
Since December 1992, TSI has distributed the GMC brand of HVACR
equipment in Georgia and now has the GMC distribution rights to almost
the entire state of Georgia. TSI sells almost exclusively to the
residential market, and management estimates that sales are
approximately evenly split between new construction and the
aftermarket. The company's sales mix is approximately 70% equipment
and 30% parts and supplies. TSI has four branches located in the
Atlanta metropolitan area and one branch in Warner Robins, a suburb of
Macon. In May 1998, TSI finalized plans to close its branch in
Valdosta in far south Georgia, as management concluded that the
Company could service the customers more economically out of the
Warner Robins branch.
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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. 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 75% of VSI's sales consisted
of GMC equipment in fiscal 1998. In fiscal 1998, the Company assigned
to management of TSI the responsibility for VSI's operations.
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.
Florida Cooling Supply, Inc.
In 1996, the Company organized Florida Cooling Supply, Inc. ("FCS")
and opened four branch operations in central Florida. The state of
Florida is among the three largest in the United States in terms of
installed HVACR systems. The Company's sales mix is approximately 25%
equipment and 75% parts and supplies.
Lifetime Filter, Inc.
Effective as of January 1, 1997, the Company acquired Lifetime Filter,
Inc. ("LFI"),
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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 is working to
augment LFI's sales by distributing LFI's filters throughout the
Company's existing wholesale distribution network.
West Coast HVAC Supply, Inc. d/b/a ACH Supply
In April 1997, West Coast HVAC Supply, Inc., a wholly-owned subsidiary
of ACRG, acquired the operating assets and liabilities of ACH Supply,
Inc., ("ACH"). ACH had two branches located east of Los Angeles. The
Company has attracted key employees with significant management
experience working for a much larger HVACR wholesale distributor in
southern California. ACH sells primarily HVACR parts and supplies,
and in January 1998, obtained the distribution rights to sell the
Armstrong brand of HVACR equipment.
Contractors Heating & Supply, Inc. ("CHS")
In September 1997, CHS, a wholly-owned subsidiary of ACRG, acquired
certain of the assets, and assumed certain of the liabilities, of
Contractors Heating and Supply Company, an HVACR distributor based in
Denver, with branch operations in Colorado Springs and Glenwood
Springs, Colorado, and in Albuquerque, New Mexico. CHS has operated
in Denver since 1945, in Colorado Springs since 1959, and in
Albuquerque since 1960, and is considered the market leader in each of
its trade areas. CHS also operates a sheet metal shop in Colorado
Springs, where products are fabricated for distribution through CHS's
wholesale operations. Approximately 25% of CHS's total sales are
products that it manufactures. Management is evaluating the
opportunity to utilize CHS's manufacturing capabilities to supply
sheet metal products to other subsidiaries of the Company.
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 have all expired, 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.
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Executive Officers of the Registrant
The Company's executive officers are as follows:
Name Age Position with the Company
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Alex Trevino, Jr. 61 Chairman of the Board and President
Anthony R. Maresca 47 Senior Vice President, Secretary, Treasurer,
and Chief Financial Officer
Alex Trevino, Jr. has served as Chairman of the Board since 1988, and
as President and Chief Executive Officer of the Company since July 1990. From
September 1987 to February 1990, he served as President of Western Operations
of the Refrigeration and Air Conditioning Group of MLX Corporation (now Pameco
Corporation), which is a national distributor of HVACR equipment and supplies.
Anthony R. Maresca has been employed by the Company since June 1985,
serving as Corporate Controller until November 1985 when he was promoted to
Senior Vice President, Chief Financial Officer and Treasurer. Mr. Maresca is a
certified public accountant.
Employees
As of February 28, 1998, the Company and its subsidiaries had
approximately 310 full-time employees. 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 25,000 square feet of showroom and warehouse space. Branch
locations that include a subsidiary's corporate office will be larger. The
Company owns the facilities occupied by LFI and by the Pasadena, Texas branch
of ACRS.
ITEM 3. LEGAL PROCEEDINGS.
As of February 28, 1998 the Company was not a party to any pending
legal proceeding that is deemed to be material to the Company and its
subsidiaries.
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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, 1998.
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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 1998
1st quarter ended 5/31/97 $ 4 5/32 $ 2 3/16
2nd quarter ended 8/31/97 2 7/8 2
3rd quarter ended 11/30/97 3 2
4th quarter ended 2/28/98 2 3/4 1 7/8
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
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As of April 30, 1998, there were 515 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 audited consolidated financial statements. This summary should be
read in conjunction with the audited consolidated financial statements and
related notes included in Item 8 of this Report. Since February 28, 1993, the
increase in sales has resulted from acquisitions and internal expansion, as
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7. of this Report. 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
1998 because of previously incurred net operating losses for which a tax
benefit had not previously been recorded. Additionally, the Company determined
in both fiscal 1998 and 1997 that further reductions in its deferred tax asset
valuation allowance were appropriate given expectations of higher future
taxable income from recently acquired businesses and, as a result, recorded
additional tax benefits of $420,000 and $360,000 in fiscal 1998 and 1997,
respectively.
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(In thousands except per share data)
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Year Ended February 28 or 29,
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Income Statement Data: 1998 1997 1996 1995 1994
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Sales $96,164 $78,371 $56,500 $41,281 $30,862
Gross profit 19,558 15,085 10,721 8,563 6,738
Operating income 2,064 1,659 765 945 615
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Income before income
taxes and cumulative effect of an
accounting
change 570 887 199 562 443
Benefit (provision) for
income taxes 333 258 (15) (4) (9)
Cumulative effect of an
accounting change - - - - 680
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Net income $ 903 $ 1,145 $ 184 $ 558 $ 1,114
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Amounts per share:
Earnings before
cumulative effect of
an accounting change $ .09 $ .11 $ .02 $ .05 $ .04
Cumulative effect of an
accounting change - - - - .07
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Basic $ .09 $ .11 $ .02 $ .05 $ .11
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Diluted $ .08 $ .10 $ .02 $ .05 $ .11
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As of February 28 or 29,
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Balance Sheet Data: 1998 1997 1996 1995 1994
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Working capital $13,547 $11,080 $ 8,118 $ 5,818 $ 3,338
Total assets 41,108 30,558 22,010 17,131 13,024
Long-term obligations 16,655 11,160 6,703 3,728 1,752
Shareholders' equity 7,960 7,006 5,666 5,482 4,924
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Operating income increased to $2,063,996 in fiscal 1998 from
$1,658,674 in fiscal 1997 and $764,714 in fiscal 1996, increases of 24% and
117% in fiscal 1998 and 1997, respectively. The increase in operating income
in fiscal 1998 was attributable to earnings from Contractors Heating & Supply
("CHS"), which the Company acquired in September 1997. Fiscal 1998 operating
income at businesses owned by the Company before 1996 was equal to or less than
fiscal 1997 operating income, as unusually moderate and wet weather conditions
during the spring and early summer of 1997 reduced demand for air conditioning
products in the Company's key markets. In fiscal 1998, the Company generally
succeeded in eliminating the operating losses at operations that were started
in fiscal 1997. The increase in operating income in 1997 was attributable to a
39% increase in sales over fiscal 1996 and a higher gross profit margin. Net
income was $903,366, $1,144,788 and $183,766 in fiscal 1998, 1997 and 1996,
respectively. Higher interest costs relating to the Company's acquisitions
significantly impacted net income in fiscal 1998. Reductions in the Company's
deferred tax asset valuation allowance increased net income by $420,000 in
fiscal 1998 and $360,000 in fiscal 1997.
Sales have increased annually, reaching $96.2 million in fiscal 1998,
compared to $78.4 million in fiscal 1997 and $56.5 million in fiscal 1996.
Each of the Company's subsidiaries has recorded sales increases from fiscal
1996 to fiscal 1998, although sales at Total Supply in Georgia declined 5% from
fiscal 1997 to fiscal 1998 due to unfavorable weather conditions and a
post-Olympic building slowdown. Prior to fiscal 1998, the majority of the
Company's sales growth had resulted from internal expansion of branch
operations rather than from acquisitions, but in fiscal 1998, 71% of the
increase in sales was attributable to operations acquired since January 1997.
In comparison, acquisitions accounted for 28% of the growth in sales from
fiscal 1996 to fiscal 1997. Although the increase in same store sales declined
from 16% in fiscal 1997 to 7% in fiscal 1998, the fiscal 1998 increase still
significantly exceeded the industry average. As expected, the greatest same
store sales growth in fiscal 1998 occurred in Florida, where the Company
completed its second year of operation. Sales of equipment manufactured by
Goodman Manufacturing Company, the Company's largest supplier, and sold under
the GMC and Janitrol brand names, had increased from $16.5 million in fiscal
1996 to a peak of $24 million in fiscal 1997, but declined to $22 million in
fiscal 1998.
The Company's gross margin percentage increased to 20.3% in fiscal
1998, from 19.2% in fiscal 1997 and 19.0% in fiscal 1996. The increase in
gross margin percentage from fiscal 1996 to fiscal 1998 is a result of the
Company's efforts to focus on starting up and acquiring businesses that would
enhance the Company's gross margin percentage. All of the Company's operations
that have been started up or acquired since 1996 attained a
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gross margin percentage exceeding the Company average. In particular, Lifetime
Filter, Inc. ("LFI"), which the Company acquired in January 1997, manufactures
most of the products it sells and obtains a much higher gross margin percentage
than the Company's wholesale operations. In addition, CHS manufactures
products that account for approximately 25% of its sales revenue and,
accordingly, achieves a higher gross margin percentage than if it purchased all
of its inventory from outside suppliers. Because only two months of LFI's
operations were included in the Company's fiscal 1997 results, the positive
impact on gross margin percentage of the Company's manufacturing operations was
significant only in fiscal 1998. In addition, as a percentage of each
company's total sales, Ener-Tech Industries, which was acquired in January
1996, and Florida Cooling Supply, which was started up in April 1996, sell
substantially less equipment than the Company's other wholesale businesses. 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. As the Company has grown in sales revenues, management has also
negotiated more favorable pricing from its major suppliers, principally in the
form of purchase volume rebates, which contributed to the increase in gross
margin percentage in both fiscal 1997 and fiscal 1998.
Selling, general and administrative ("SG&A") costs as a percentage of
sales increased to 18.5% in fiscal 1998, from 17.7% in fiscal 1997 and 17.8% in
fiscal 1996. The increase from fiscal 1997 to fiscal 1998 was due in part to
the SG&A percentage at LFI and ACH. LFI's manufacturing operations are
generally expected to incur a higher SG&A costs as a percentage of sales than
the Company's distribution operations, which will generally have a higher sales
volume and lower gross margin percentage. At ACH, which was acquired in April
1997, SG&A costs as a percentage of sales are higher than would ordinarily be
expected because the Company has staffed ACH to support a greater sales volume
than is presently realized, expecting to grow the company significantly in the
next several years. In fiscal 1998, the Company also recorded $580,000 more
bad debt expense than in fiscal 1997, which was largely attributable to the
unexpected business failure of a single customer in the fourth quarter of
fiscal 1998, with respect to which the Company wrote off $371,000 of accounts
receivable. In fiscal 1997, the Company recorded a non-recurring charge of
$125,000 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. In calendar 1997, the supplier modified this arrangement to
reduce the commission rate to approximately 70% of the rate in calendar 1996.
Revenues from this source were $155,380 and $290,919 in fiscal 1998 and 1997,
respectively. In calendar 1998, the Company and the supplier discontinued this
arrangement, and the Company does not expect to earn such commission income
after fiscal 1998.
Net energy services income increased 19% from fiscal 1997 to fiscal
1998 and 13% from fiscal 1996 to fiscal 1997 as the Company continued to
provide services on a month-to-
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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 82% in fiscal 1998 compared to fiscal 1997,
and 44% in fiscal 1997 compared to 1996 as a result of the Company's increased
borrowings. In 1998, 1997 and 1996, interest expense was 1.8%, 1.2% and 1.1%
of sales, respectively. The increase in interest expense in fiscal 1998 was
attributable to indebtedness incurred in connection with the Company's
acquisitions of LFI and CHS. See Liquidity and Capital Resources, below.
Other non- operating income increased 26% from fiscal 1997 to fiscal 1998, and
94% from fiscal 1996 to fiscal 1997 as the Company has 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 both fiscal 1998 and 1997, the Company determined that
further reductions in its deferred tax asset valuation allowance were
appropriate given expectations of higher future taxable income from recently
acquired subsidiaries and, as a result, recorded additional tax benefits of
$420,000 and $360,000 in fiscal 1998 and 1997, respectively.
Liquidity and Capital Resources
Working capital increased from $11.1 million at February 28, 1997 to
$13.5 million at February 28, 1998 as a result of the Company's earnings and
the CHS acquisition. Accounts receivable represented 53 days of gross sales at
the end of fiscal 1998, compared to 54 days of sales in receivables at the end
of fiscal 1997. Of the $3.3 million increase in inventory, $2.7 million was
located at operations acquired in fiscal 1998. In addition, the Company had
$900,000 of HVACR equipment inventory at Heating and Cooling Supply at February
28, 1998, which replaced Janitrol brand equipment held on consignment in
previous fiscal years.
The Company has credit facilities with a commercial bank ("Bank")
which include an $18 million revolving line of credit and a $500,000 term loan
facility for the purchase of capital equipment. At February 28, 1998, the
Company had available credit of $2,171,556 and $112,810 under the revolving
credit line and the term loan facility, respectively. 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 85% of
eligible accounts receivable and 50% of eligible inventory amounts. Borrowings
under the facility bear interest, at the Company's option, at either the Bank's
prime rate plus 1/2% or LIBOR plus 3.00%, payable monthly. Restrictive
covenants of the loan
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agreement prohibit the Company from paying dividends, prepaying any
subordinated indebtedness or incurring certain other debt without the Bank's
consent, and also require the Company to maintain certain financial ratios (see
Note 4 of Notes to Consolidated Financial Statements). The credit line and the
term loan facilities mature in fiscal 2000 and fiscal 2002, respectively. A
schedule of declining prepayment penalties applies in the event that the line
of credit facility is paid prior to maturity. Net additional borrowings under
the Company's revolving line of credit during fiscal 1998 were for the purpose
of acquiring CHS. See Results of Operations, above.
During fiscal 1998, the Company borrowed $1,990,000 in two separate
transactions from The Catalyst Fund, Ltd. and an affiliate ("Catalyst") to
acquire ACH and to repay outstanding indebtedness to St. James Capital
Partners, L.P. ("St. James"). Such borrowings bear interest at 12 1/2% per
annum, payable monthly. Principal is to be repaid in monthly installments of
$8,333 from February 1998 through January 1999, $30,000 from February 1999
through August 1999, $48,750 from September 1999 through August 2001, and
$30,000 from September 2001 through January 2003. The borrowings are
subordinated to the Company's indebtedness to the Bank. In connection with
such borrowings, the Company also granted Catalyst a warrant to purchase
175,000 shares of the Company's common stock at a price of $2.06 per share,
exercisable at any time before February 28, 2003. Covenants of the Company's
loan agreement with Catalyst, which also covers a prior loan by Catalyst to the
Company and certain subsidiaries, prohibit dividends and restrict additional
borrowings without Catalyst's consent, and also require the Company to maintain
specified financial ratios (see Note 4 of Notes to Consolidated Financial
Statements).
The St. James indebtedness that was repaid with the proceeds of the
Catalyst loans described above had been incurred in 1997 in connection with the
purchase of LFI. The St. James note had an interest rate of 10% per annum, was
convertible into common stock of the Company at $2.40 per share and had an
initial maturity date of January 24, 1998. At its option, the Company could
have extended the maturity date for one year upon issuance of a warrant for
154,000 shares of the Company's common stock at an exercise price of $1.625.
In connection with the acquisitions of CHS and ACH in fiscal 1998, the
Company issued notes to the sellers aggregating $1,280,000, which are
subordinated to the Bank. Such debt is payable over terms of two to three
years and bears interest at 9% per annum at February 28, 1998. The rate on the
CHS note varies with changes in the prime rate.
The Company made capital expenditures of $850,000 in fiscal 1998 for
leasehold improvements, computer software, equipment, and the addition and
replacement of vehicles under capital leases. The Company has no material
commitments for future capital expenditures. During fiscal 1998, the Company
sold land that it owned in Las Vegas to a buyer which is constructing an
office/warehouse that the Company has agreed to lease for an initial term of
ten years. The buyer also assumed $250,000 of mortgage indebtedness on
- 17 -
<PAGE> 18
the land.
The Company has approximately $32 million in tax loss carryforwards
and $1.1 million in tax credit carryforwards. Such operating loss and tax
credit carryforwards will substantially limit the Company's federal income tax
liabilities in the near future. 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.
The Company expects that cash flows from operations and the borrowing
availability under its revolving credit facility will provide sufficient
liquidity to meet its normal operating requirements, existing debt service and
expected capital expenditures. Subject to limitations set forth in its loan
agreement with the Bank, funds available under the Company's revolving credit
facility may also be utilized to finance acquisitions. The Company is actively
considering additional financing alternatives in order to continue its plan of
acquiring other HVACR distribution companies. Such financing may be in the
form of subordinated debt, equity or some combination of debt and equity.
Although management has engaged in discussions with several potential lenders
or investors, the Company has no commitment for additional financing and cannot
predict whether or when any such additional financing may materialize.
Management is also reviewing the suitability of several acquisition
opportunities, but has not entered into letters of intent to acquire any
companies. The Company's ability to consummate a significant acquisition would
be dependent upon obtaining additional financing.
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, slightly
affected the Company's previous seasonality, as CHS generally experiences its
highest level of sales in the third quarter of the Company's fiscal year.
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.
- 18 -
<PAGE> 19
Year 2000 Issue
The Company has evaluated the exposure of its computer software and
systems to the problem commonly known as the Year 2000 issue. Although the
Company's software applications already generally accommodate dates in the year
2000, the Company will acquire in fiscal 1999 an upgrade, available under its
existing licensing agreement, to its existing integrated computer software
application that is fully year 2000 compliant. One of the Company's
subsidiaries does not utilize the Company's integrated software and is
presently involved in modifying its computer programs to accommodate year 2000.
The Company believes that it will be fully year 2000 compliant by the end of
fiscal 1999 and does not expect that its costs to achieve compliance will be
material to its operations.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components.
It is effective in the first quarter of fiscal 1999, and its adoption will have
no impact on the Company's net income or shareholders' equity.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes"new
standards for reporting information in both annual and interim financial
statements. It is required to be adopted by the Company in fiscal 1999. At
that time, the Company will be required to present financial and descriptive
information about its operating segments under the "management approach" versus
the "industry segment approach". The Company is currently evaluating the
impact of the new statement on the financial disclosures of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
- 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, 1998 and
February 28, 1997 22
Consolidated statements of operations for the fiscal years
ended February 28, 1998, February 28, 1997 and February 29, 1996 24
Consolidated statements of shareholders' equity for the
fiscal years ended February 28, 1998, February 28, 1997
and February 29, 1996 25
Consolidated statements of cash flows for the fiscal years
ended February 28, 1998, February 28, 1997 and February 29, 1996 26
Notes to Consolidated Financial Statements 28
</TABLE>
- 20 -
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
ACR Group, Inc.
We have audited the accompanying consolidated balance sheets of ACR Group, Inc.
and subsidiaries as of February 28, 1998 and February 28, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended February 28, 1998. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ACR Group, Inc.
and subsidiaries at February 28, 1998 and February 28, 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
May 15, 1998
-21-
<PAGE> 22
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Current assets:
Cash $ 90,000 $ 412,699
Accounts receivable, net of allowance
for doubtful accounts of $762,709 in
1998 and $584,024 in 1997 11,888,542 8,914,933
Inventory 16,962,351 13,667,019
Prepaid expenses and other 611,873 130,142
Deferred income taxes 487,000 347,000
----------- -----------
Total current assets 30,039,766 23,471,793
----------- -----------
Property and equipment, net of
accumulated depreciation 3,713,827 3,435,406
Deferred income taxes 973,000 693,000
Goodwill, net of accumulated amortization
of $297,836 in 1998 and $176,361 in
1997 5,962,700 2,657,500
Other assets 418,528 299,911
----------- -----------
Total assets $41,107,821 $30,557,610
=========== ===========
</TABLE>
- 22 -
<PAGE> 23
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1998 AND 1997
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 1,087,620 $ 1,255,631
Current maturities of capital lease
obligations 249,445 201,969
Accounts payable 14,009,495 9,925,146
Accrued expenses and other liabilities 1,146,211 1,008,972
----------- -----------
Total current liabilities 16,492,771 12,391,718
----------- -----------
Long-term debt 16,282,153 10,735,064
Long-term capital lease obligations 372,477 424,828
----------- -----------
Total liabilities 33,147,401 23,551,610
----------- -----------
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 10,634,017 shares in 1998
and 10,371,555 shares in 1997 106,340 103,716
Additional paid-in capital 41,669,200 41,620,770
Accumulated deficit (33,815,120) (34,718,486)
----------- -----------
Total shareholders' equity 7,960,420 7,006,000
----------- -----------
Total liabilities and
shareholders' equity $41,107,821 $30,557,610
=========== ===========
</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, 1998, FEBRUARY 28,
1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales $96,164,148 $78,371,020 $56,500,253
Cost of sales 76,606,033 63,285,694 45,779,447
----------- ----------- -----------
Gross profit 19,558,115 15,085,326 10,720,806
Selling, general and
administrative expenses (17,819,076) (13,859,797) (10,082,119)
Commission income 155,380 290,919 -
Energy services income, net 169,577 142,226 126,027
----------- ----------- -----------
Operating income 2,063,996 1,658,674 764,714
Interest expense (1,686,830) (925,409) (644,767)
Other non-operating income 193,319 153,238 78,863
----------- ----------- -----------
Income before income taxes 570,485 886,503 198,810
Provision (benefit) for income taxes:
Current 87,119 101,715 15,044
Deferred (420,000) (360,000) -
----------- ----------- -----------
Net income $ 903,366 $ 1,144,788 $ 183,766
=========== =========== ===========
Earnings per common share:
Basic $ .09 $ .11 $ .02
Diluted .08 .10 .02
</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, 1998, FEBRUARY 28,
1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Additional
No. of Shares Paid-In Accumulated
Issued Par Value Capital Deficit Total
---------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
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
Exercise of options 262,462 2,624 (1,570) - 1,054
Issuance of warrant - - 50,000 - 50,000
Net income - - - 903,366 903,366
---------- -------- ----------- ------------ ----------
Balance, February 28, 1998 10,634,017 $106,340 $41,669,200 $(33,815,120) $7,960,420
========== ======== =========== ============ ==========
</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, 1998, FEBRUARY 28,
1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 903,366 $1,144,788 $ 183,766
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation 826,018 622,243 473,820
Amortization 203,660 82,794 69,145
Deferred income tax benefit (420,000) (360,000) -
Stock issued as compensation - 125,000 -
Provision for bad debts 832,515 252,572 326,349
(Gain) loss on sale of assets (455) (798) 8,395
Changes in operating assets and
liabilities:
Accounts receivable (1,931,772) (1,772,188) (2,192,222)
Inventory (913,528) (3,673,165) (1,090,047)
Prepaid expense and other
assets (373,327) (172,147) 297,499
Accounts payable 2,163,174 1,521,117 1,009,879
Accrued expenses and other
liabilities (20,937) 425,050 22,058
---------- ---------- ----------
Net cash provided by (used in)
operating activities 1,268,714 (1,804,734) (891,358)
---------- ---------- ----------
Investing activities:
Acquisition of property and
equipment (659,844) (754,686) (956,744)
Acquisition of businesses, net of
cash acquired (4,314,882) (895,651) (94,813)
Proceeds from disposition of assets 270,683 42,951 27,844
---------- ---------- ----------
Net cash used in investing activities (4,704,043) (1,607,386) (1,023,713)
---------- ---------- ----------
Financing activities:
Proceeds from long-term debt 7,243,588 4,293,457 3,045,019
Payments on long-term debt (4,132,012) (816,800) (944,531)
Exercise of stock options 1,054 - -
---------- ---------- ----------
Net cash provided by financing
activities 3,112,630 3,476,657 2,100,488
---------- ---------- ----------
Net increase (decrease) in cash (322,699) 64,537 185,417
Cash at beginning of year 412,699 348,162 162,745
---------- ---------- ----------
Cash at end of year $ 90,000 $ 412,699 $ 348,162
========== ========== ==========
</TABLE>
(continued)
- 26 -
<PAGE> 27
ACR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 28,
1997 AND FEBRUARY 29, 1996
(continued)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired $5,740,545 $1,305,466 $ 461,113
Fair value of liabilities assumed (4,099,618) (66,932) (553,814)
Goodwill 3,389,970 1,241,426 127,701
Notes payable to sellers 762,903 1,166,662 291,789
Purchase of property and equipment
(net of cash paid):
For notes payable - 250,000 -
Under capital leases 190,239 371,118 289,921
Sale of assets for note receivable 201,136 - -
Supplemental cash flow information:
Interest paid 1,499,458 917,373 635,585
Federal income taxes paid 21,300 22,000 6,062
</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, Nevada, New Mexico, Colorado and southern California.
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.
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 a field warehouse agent whereby HVACR equipment is held for
sale in bonded warehouses located at the premises of the Company's operations
in Georgia and Memphis, with payment due only when products are sold. Such
inventory is accounted for as consigned merchandise and is not recorded on
the Company's
- 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)
balance sheet. The cost of such inventory held in the bonded warehouses was
$8,048,017 at February 28, 1998 and $15,998,345 at February 28, 1997.
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.
Buildings 20-40 years
Leasehold improvements Primary term of the lease
Furniture and fixtures 5-7 years
Vehicles 3-6 years
Other equipment 3-10 years
Goodwill
Goodwill represents the excess cost of companies acquired over the
fair value of their tangible assets. Substantially all goodwill is being
amortized on a straight-line basis over 40 years. The carrying value of
goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill
will be reduced by the estimated shortfall of the undiscounted cash flows.
Income Taxes
The Company and its subsidiaries file a consolidated federal income
tax return. The Company uses the liability method in accounting for income
taxes. Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and
- 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 (continued)
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
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share". SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share are very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been restated.
Stock Options
In fiscal 1997, the Company adopted 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.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components.
It is effective in the first quarter of fiscal 1999 and adoption will have no
impact
- 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)
Recently Issued Accounting Standards (continued)
on the Company's net income or shareholder's equity.
In June 1997, the FASB also issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which establishes new
standards for reporting information in both annual and interim financial
statements. It is required to be adopted by the Company in fiscal 1999. At
that time, the Company will be required to present financial and descriptive
information about its operating segments under the "management approach" versus
the "industry segment approach." The Company is currently evaluating the
impact of the new statement on the financial disclosures of the Company.
2 - Acquisitions
On September 9, 1997, the Company, through a wholly-owned subsidiary,
acquired certain of the assets, and assumed certain of the liabilities, of
Contractors Heating and Supply Company ("CHS"). CHS was paid $4,626,315 cash
at closing, and received a promissory note ("Note") for $1,200,000. The
liabilities assumed by the Company's subsidiary included $1,200,000 owed by CHS
to certain of its shareholders, which was paid in full at closing by the
Company's subsidiary. The Note is to be repaid in three annual principal
installments of $400,000 each, plus accrued interest at the prime rate plus
1/2%, beginning August 31, 1998, and is secured by a first lien on machinery
and equipment purchased from CHS that is used to fabricate sheet metal
products. The Note is subordinated to the Company's indebtedness to its senior
secured lender (Note 4).
In January 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. As consideration for such acquisitions, the Company paid
$1,280,662 to O'Leary and OFP, and LFI issued a promissory note to OFP (the
"OFP Note") for $1,166,662. In January 1998, pursuant to a formula set out in
the Agreement, the OFP Note was reduced by $437,097, because sales of filters
manufactured by LFI failed to reach a specified dollar volume in 1997. The
excess of the final purchase price over the estimated fair value of the net
assets acquired was $804,239, which was
- 31 -
<PAGE> 32
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2 - Acquisitions (continued)
recorded as goodwill.
Each of the acquisitions described above 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.
Unaudited pro forma results of the Company's operations for the years ended
February 28, 1998 and February 28, 1997, as if the acquisition of CHS occurred
as of the beginning of each of such fiscal years, and as if the acquisitions of
LFI and OFP occurred as of the beginning of fiscal 1997, are as follows:
1998 1997
------------ ------------
Sales $105,633,688 $100,569,978
Net income 993,846 2,423,658
Earnings per common share:
Basic $0.10 $0.24
Diluted 0.08 0.22
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 combinations occurred on
March 1, 1997 or March 1, 1996, as applicable, or of future results of
operations of the consolidated entities.
In April 1997, the Company acquired for approximately $70,000 the
assets and liabilities of ACH Supply, Inc. ("ACH"), a wholesale distributor of
HVACR products with two branches in the Los Angeles area. Pro forma results of
operations relating to this acquisition are not presented because the effects
of the acquisition would not be material.
- 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>
1998 1997
----------- ----------
<S> <C> <C>
Land $ 279,495 $ 693,246
Building and leasehold
improvements 1,473,339 1,274,429
Furniture and fixtures 149,821 119,077
Vehicles 1,507,782 1,242,964
Other equipment 2,712,360 1,747,913
Energy management equipment 260,887 260,887
------- ----------
6,383,684 5,338,516
Less accumulated depreciation (2,669,857) (1,903,110)
----------- ----------
Net property and equipment $3,713,827 $3,435,406
========== ==========
</TABLE>
Capitalized lease assets of $1,183,086 and $982,377, together with
accumulated amortization of $575,624 and $325,706 are included in property and
equipment as of February 28, 1998 and 1997, respectively. Amortization expense
is included with depreciation expense.
4 - Debt
Debt is summarized as follows at the end of February:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revolving line of credit $12,528,527 $ 7,400,000
Notes payable - Catalyst Fund
and affiliate 2,242,599 527,250
Notes payable to sellers of
companies acquired (Note 2) 1,742,234 1,409,994
Note payable - St. James Capital
Partners, L.P. - 1,330,000
Real estate loan 350,400 629,200
Equipment term loan 387,190 355,128
Other 118,823 339,123
----------- -----------
17,369,773 11,990,695
Less current maturities (1,087,620) (1,255,631)
----------- -----------
Long-term debt, less current
maturities $16,282,153 $10,735,064
=========== ===========
</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 $18
million, including up to $1 million for letters of credit. Borrowings under
the facility bear interest, at the Company's option, at either the Bank's prime
rate plus 1/2% or LIBOR plus 3.00%, payable monthly. At February 28, 1998,
the Company had elected the LIBOR interest option (8.84%) for $12 million of
borrowings under the facility, with the balance at the prime rate option (9%).
Borrowings are limited to 85% of eligible accounts receivable and 50% of
eligible inventory amounts. As of February 28, 1998, the Company's available
credit under the facility was $2,171,556. Restrictive covenants of the loan
agreement prohibit the Company from paying dividends, prepaying any
subordinated indebtedness or incurring certain other debt without the Bank's
consent, and also require the Company to maintain certain financial ratios. At
February 28, 1998, the Company obtained a waiver from the Bank with respect to
a loan covenant that limits the maximum allowable net loss in a single month.
The Company expects to be in compliance with the Bank covenants during fiscal
1999. The revolving credit facility matures August 31, 2000. A schedule of
declining prepayment penalties applies in the event of payment prior to
maturity.
In January 1998, the Company obtained loans aggregating $1.54 million
from The Catalyst Fund, Ltd. ("Catalyst") and an affiliate of Catalyst to pay
the Company's outstanding indebtedness to St. James Capital Partners, L.P.
("St. James"). These loans are to be repaid in monthly installments of $8,333
plus interest from February 1998 through January 1999, and $30,000 plus
interest from February 1999 through January 2003. In April 1997, the Company
also borrowed $450,000 from Catalyst to acquire and provide working capital for
ACH (see Note 2). The repayment terms of this loan are interest only until
September 1999, and monthly installments of $18,750 plus interest from
September 1999 through August 2001. The Company previously borrowed $1 million
from Catalyst in 1993, which is being repaid in monthly installments of
$22,498, including interest. In April 1997, the repayment schedule of the 1993
loan was amended such that beginning January 1999, no further principal
payments are due until January 2003, when the remaining principal balance of
$109,059 will be payable in full. The interest rate on all of the Catalyst
notes is 12 1/2% per annum. The Catalyst loans are all secured by the stock
and operating assets of certain of the Company's subsidiaries and an assignment
of proceeds from life insurance policies on the Company's President. Catalyst
has subordinated its security interests to the Bank. In connection with the
January 1998 loans, the Company granted Catalyst a warrant to purchase 175,000
shares of the Company's common stock at a price of $2.06 per share, exercisable
at any time before February 28, 2003. The proceeds of the January 1998 loans
were allocated between the debt and the warrant,
- 34 -
<PAGE> 35
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - Debt (continued)
resulting in a debt discount of $50,000, which is being amortized to expense
over the term of the loan. In connection with the 1993 loan, the Company
granted Catalyst a warrant to purchase 1,000,000 shares of the Company's common
stock at a price of $0.59 per share and, in connection with the amendment to
the repayment schedule of the 1993 loan during fiscal 1998, the expiration date
of the warrant was extended until February 28, 2003 (see Note 7). Covenants of
the Company's loan agreement with Catalyst, which covers all of the Catalyst
loans, prohibit dividends and restrict additional borrowings without Catalyst's
consent, and also require the Company to maintain specified financial ratios.
The Company has obtained waivers of certain covenants in the Catalyst loan
agreement as of February 28, 1998 and through August 30, 1998. Considering the
waiver, the Company expects to be in compliance with the Catalyst covenants
during fiscal 1999.
In connection with its acquisition of LFI in January 1997 (see Note
2), the Company obtained $1.4 million in financing from St. James. The note
issued to St. James had an interest rate of 10% per annum and was convertible
into common stock of the Company at $2.40 per share. 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 $70,000, which was
charged to expense during the term of the loan. The St. James note had an
initial maturity date of January 24, 1998, which could be extended for one year
at the Company's sole discretion. At February 28, 1997, the Company expected
to exercise such extension option and classified the St. James note as
long-term debt. In January 1998, the Company repaid the St. James note and
accrued interest thereon with the proceeds of the loan from Catalyst and an
affiliate of Catalyst described in the preceding paragraph.
The notes payable to sellers include debt incurred in connection with
the acquisitions of CHS and ACH in fiscal 1998, LFI in fiscal 1997, and
Ener-Tech Industries, Inc. in fiscal 1996 (see Note 2) and are payable in
installments over terms of two to four years. The notes to both the CHS and the
LFI sellers bear interest at prime plus 1/2% (9% at February 28, 1998), and the
rate on the other notes is fixed at 9%. The notes to the sellers of CHS and
LFI are secured by a first lien on certain production machinery and real
property. All of the notes payable to sellers are subordinated to the
Company's indebtedness to the Bank.
The Company also has mortgage indebtedness to the Bank, which is
secured by a deed of trust on both the land and building occupied by a branch
facility
- 35 -
<PAGE> 36
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4 - Debt (continued)
in the Houston area. The note 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. In fiscal 1998,
the Company sold land in Las Vegas, on which $250,000 was owed at February 28,
1997, to a buyer who assumed the indebtedness and is constructing a new
office/warehouse to be occupied by the Company. The Company also has a term
loan facility with 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%. Principal is being repaid at $1,200 monthly, with the
unpaid principal balance payable in full in 2002.
Based upon the borrowing rates currently available to the Company for
debt instruments with similar terms and average maturities, the carrying value
of long-term debt approximates fair value.
Future maturities of debt are $1,087,620 in 1999, $1,164,875 in 2000,
$13,891,730 in 2001, $806,490 in 2002 and $419,058 in 2003.
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>
1999 $301,559
2000 230,662
2001 137,088
2002 15,540
2003 1,799
--------
Total minimum lease payments 686,648
Less amounts representing interest (64,726)
--------
Present value of future minimum
lease payments 621,922
Less current maturities of
capital lease obligations (249,445)
--------
Long-term obligations under
capital leases $372,477
========
</TABLE>
- 36 -
<PAGE> 37
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5 - Lease Commitments (continued)
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 2008. 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 $2,140,823 in 1999, $2,109,378 in 2000, $1,862,121 in 2001,
$1,208,135 in 2002, $823,298 in 2003 and $1,973,038 after 2003.
Rental expenses were $1,800,350, $1,292,999 and $994,251 in 1998, 1997
and 1996 respectively.
6 - Income Taxes
The Company recognizes a tax benefit from a net operating loss
carryforward if it is more likely than not that such benefit will ultimately be
realized. Such a tax benefit is recorded on the balance sheet as a deferred
tax asset. To the extent that it cannot be determined that such tax benefit
will more likely than not be realized, a valuation allowance is established
against the deferred tax asset. The deferred tax asset is classified as
current to the extent that a tax benefit is expected to be realized in the next
fiscal period.
The Company has not recorded a provision for income taxes other than
alternative minimum taxes and state income taxes for fiscal years 1996 through
1998 because of previously incurred net operating losses for which a tax
benefit had not previously been recorded. Additionally, the Company determined
in both fiscal 1998 and 1997 that further reductions in its deferred tax asset
valuation allowance were appropriate given expectations of higher future
taxable income from recently acquired businesses and, as a result, recorded
additional tax benefits of $420,000 and $360,000 in fiscal 1998 and 1997,
respectively. 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:
- 37 -
<PAGE> 38
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6 - Income Taxes (continued)
<TABLE>
<CAPTION>
Year Ended February 28 or 29,
------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate $ 193,965 $ 301,411 $ 67,595
Increase (reduction) in tax
expense resulting from:
Change in valuation allowance (650,299) (668,578) (93,539)
Nondeductible expenses 57,868 48,725 39,640
Other 65,585 60,157 1,348
--------- --------- --------
Actual income tax provision
(benefit) $(332,881) $(258,285) $ 15,044
========= ========= ========
</TABLE>
As of February 28, 1998 and 1997, the Company has net operating loss
carryforwards of $32.1 million and $32.7 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, 1998 and February
28, 1997, 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 $11.2 million and $11.8 million as of February 28, 1998 and
February 28, 1997, respectively, to offset the deferred tax assets related
primarily to the loss carryforward and the credit carryforwards. The decrease
in the valuation allowance from fiscal 1997 to 1998 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, 1998.
7 - Stock Option Agreements and Equity Transactions
Pursuant to an employment contract that expired February 28, 1998, the
President of the Company was granted 125,000 shares of the Company's common
stock ("Stock"), valued at $125,000, during fiscal 1997. In addition, he
received options to purchase 125,000 shares of Stock which are presently
exercisable at prices from $0.76 to $2.81 per share and expire from May 1999 to
June 2002. During fiscal 1998, the President exercised options for 8,437
shares at $.13 per share and 325,000 shares at $0.49 per share in a cashless
exercise that resulted in the issuance of 254,025 shares of Stock. Effective
March 1, 1998, both the President and the Chief Financial Officer of the
Company entered into employment contracts that expire February 28, 2002, and
in connection therewith, were
- 38 -
<PAGE> 39
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7 - Stock Option Agreements and Equity Transactions (continued)
granted options to purchase 300,000 and 100,000 shares of Stock, respectively,
at $2.24 per share. Such options will vest on March 1, 2006. The option
agreements further provide for accelerated vesting if the market price of
Stock, as defined in the agreements, reaches specified levels prior to the
stated vesting date.
In connection with its financing provided to the Company, St. James
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 1,000,000 shares of the Company's common stock at a price of $.59 per
share, exercisable at any time before February 2003. See Note 4. During 1997,
Catalyst sold 250,000 of such warrants to St. James. In connection with a
January 1998 loan to the Company (see Note 4) Catalyst and an affiliate
received warrants to purchase an aggregate of 175,000 shares of the Company's
common stock at a price of $2.06 per share, exercisable at any time before
February 2003. Certain of these warrants outstanding, pursuant to which
1,175,000 shares of common stock may be acquired, contain a put option under
certain limited circumstances. The features enabling the holder to exercise
the put option are either within management's control or, at the Company's
option, provide for a net cash or net share (non-redeemable preferred shares
with a defined coupon rate) settlement.
In fiscal 1997, the Company established the 1996 Stock Option Plan for
key employees and directors of the Company and its subsidiaries. The plan
provides for granting up to 500,000 non-qualified and/or incentive stock
options. 134,500 options were granted in fiscal 1998 (none in fiscal year
1997) and 365,500 shares of common stock were available for future grants at
February 28, 1998.
A summary of the Company's stock option activity and related
information follows:
- 39 -
<PAGE> 40
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7 - Stock Option Agreements and Equity Transactions (continued)
<TABLE>
<CAPTION>
Year Ended February 28 or 29,
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
Beginning of year 423,437 $0.53 423,437 $0.53 383,437 $0.50
Granted 209,500 $2.51 - - 40,000 $0.74
Exercised (333,437) $0.48 - - -
------- ------- -------
Outstanding -
End of year 299,500 $1.96 423,437 $0.53 423,437 $0.53
Exercisable -
End of year 200,000 $1.69 423,437 $0.53 423,437 $0.53
Weighted average
fair value of
options granted $ 1.38 $ - $ 0.33
during year
</TABLE>
90,000 options outstanding at February 28, 1998 have a weighted average
exercise price of $.69 per share with the range from $.55 to $.77 per share.
These options have a weighted average contractual life remaining of 1.7 years.
209,500 options outstanding at February 28, 1998 have a weighted average
exercise price of $2.51 per share with the range from $1.875 to $2.81 per
share. These options have a weighted average contractual life remaining of 4.5
years.
Pro forma information has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
No. 123. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model. For options granted during fiscal
1998 and 1996, the following assumptions were used:
- Expected life of 5 years
- No expected dividend yield
- Expected volatility of .622 in fiscal 1998 and .57 in fiscal
1996
- Risk-free interest rate of 5.0%
- 40 -
<PAGE> 41
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7 - Stock Option Agreements and Equity Transactions (continued)
The Company's pro forma information follows:
<TABLE>
<CAPTION>
Year Ended February 28 or 29,
------------------------------------------------------
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Net income under APB25 $903,366 $1,144,788 $183,766
Effect of FASB 123 (164,879) - (13,050)
-------- ---------- --------
Pro forma net income 738,487 1,144,788 170,716
Pro forma basic earnings per share $ 0.07 $ 0.11 $ 0.02
Pro forma diluted earnings per share $ 0.06 $ 0.10 $ 0.02
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, these models require the input of
highly subjective assumptions including the expected stock price volatility.
Because of these inherent assumptions, the existing models do not necessarily
provide a reliable single measure of the fair value of the Company's employee
stock options. As a result of the above factors, possible future grants and
the vesting provisions of the Company's stock options, the pro forma results
would not necessarily be representative of the effects on reported net income
for future years.
8 - Profit Sharing Plan
The Company has a qualified profit sharing plan ("Plan") under Section
401(k) of the Internal Revenue Code. The Plan is open to all eligible
employees. The Company matches 50% of the participant's contributions, not to
exceed 3% of each participant's compensation. Company contributions to the
Plan were $138,416, $111,609 and $94,247 for fiscal 1998, 1997 and 1996,
respectively.
9 - Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
- 41 -
<PAGE> 42
ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9 - Earnings per Share (continued)
<TABLE>
<CAPTION>
Year Ended February 28 or 29,
------------------------------------------------------
1998 1997 1996
-------- ---------- ---------
<S> <C> <C> <C>
Numerator:
Net income $ 903,366 $1,144,788 $ 183,766
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 903,366 $1,144,788 $ 183,766
=========== ========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,376,886 10,309,055 10,246,555
Effect of dilutive securities:
Employee stock options 268,842 211,674 110,060
Warrants 912,280 434,809 156,458
Convertible debt 452,483 - -
----------- ---------- -----------
Dilutive potential common shares 1,633,605 646,483 266,518
----------- ---------- -----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 12,010,491 10,955,538 10,513,073
=========== =========== ===========
Basic earnings per share $ 0.09 $ 0.11 $ 0.02
Diluted earnings per share $ 0.08 $ 0.10 $ 0.02
</TABLE>
- 42 -
<PAGE> 43
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.
- 43 -
<PAGE> 44
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, 1998, February 28, 1997 and February 29, 1996 is included in this
report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are denoted by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from,
either (a) Annual Report on Form 10-K for Fiscal Year Ended June 30, 1991
(referred to as "1991 10-K"), or (b) Annual Report on Form 10-K for fiscal year
ended February 28, 1993 (referred to as "1993 10-K"), or (c) Form S-8
Registration Statement under the 1933 Act for Registrant, Registration No.
333-16325 filed November 18, 1996 (referred to as "RS 333-16325"), or (d)
Current Report on Form 8-K dated January 24, 1997, or (e) Annual Report on 10-K
for fiscal year ended February 28, 1997 (referred to as "1997 10-K"), or (f)
Form 10-Q for quarter ended August 31, 1997 (referred to as "August 31, 1997
10-Q").
- 44 -
<PAGE> 45
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
* 3.1 Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)
* 3.2 Articles of Amendment to Articles of Incorporation (Exhibit 3.2 to 1993 10-K)
* 3.3 Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)
* 3.4 Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993 10-K)
* 4.1 Specimen of Common Stock Certificate of ACR Group, Inc. (Exhibit 4.1 to 1993 10-K)
10.1 Employment Agreement between the Company and Alex Trevino, Jr. dated as of March 1,
1998
10.2 Stock Option Agreement between the Company and Alex Trevino, Jr. dated as of March 1,
1998
10.3 Employment Agreement between the Company and Anthony R. Maresca dated as of March 1,
1998
10.4 Stock Option Agreement between the Company and Anthony R. Maresca dated as of March 1,
1998
10.5 Registration Rights Agreement by and between the Company, Alex Trevino, Jr. and
Anthony R. Maresca
* 10.6 Note Agreement between The Catalyst Fund, Ltd., as Lender, and the Company, ACR
Supply, Inc., Fabricated Systems, Inc. and Heating and Cooling Supply, Inc., as
Borrowers, dated as of May 27, 1993 (Exhibit 10.18 to 1993 10-K)
10.7 First Amendment to Note Agreement by and among The Catalyst Fund, Ltd., the Company,
ACR Supply, Inc., Total Supply, Inc. f/k/a Fabricated Systems, Inc., Heating and
Cooling Supply, Inc. and West Coast HVAC Supply, Inc., dated as of April 14, 1997
</TABLE>
- 45 -
<PAGE> 46
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.8 Second Amendment and Restated Note Agreement by and between the Company, all
subsidiaries of the Company, The Catalyst Fund, Ltd., and Southwest/Catalyst Capital,
Ltd., dated as of January 28, 1998
10.9 Warrant for the Purchase of 750,000 Shares of Common Stock of the Company issued to
The Catalyst Fund, Ltd. dated January 28, 1998
10.10 Warrant for the Purchase of 50,000 Shares of Common Stock of the Company issued to The
Catalyst Fund, Ltd. dated January 28, 1998
10.11 Warrant for the Purchase of 125,000 Shares of Common Stock of the Company issued to
Southwest/Catalyst Capital, Ltd. dated January 28, 1998
10.12 Registration Rights Agreement between The Catalyst Fund, Ltd. and the Company dated as
of January 28, 1998
10.13 Registration Rights Agreement between Southwest/Catalyst Capital, Ltd. and the Company
dated as of January 28, 1998
*10.14 Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated
as of August 27, 1997 (Exhibit 10.1 to August 31, 1997 10-Q)
*10.15 First Amendment to Loan and Security Agreement by and between the Company and
NationsBank of Texas, N.A. dated as of September 9, 1997 (Exhibit 10.2 to August 31,
1997 10-Q)
*10.16 Purchase Agreement by and among the Company, Richard O'Leary, Lifetime Filter, Inc.
and O'Leary Family Partnership, Ltd. (Exhibit 2.1 to Form 8-K dated January 24, 1997)
*10.17 1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS 333-16325)
</TABLE>
- 46 -
<PAGE> 47
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
*10.18 Agreement of Purchase and Sale by and between the Company and St. James Capital
Partners, L.P. dated as of January 24, 1997 (Exhibit 10.15 to 1997 10-K)
*10.19 10% Convertible Promissory Note of the Company issued to St. James Capital Partners,
L.P. dated as of January 24, 1997 (Exhibit 10.16 to 1997 10-K)
*10.20 Warrant to Purchase 280,000 Shares of Common Stock of the Company issued to St. James
Capital Partners, L.P. dated January 24, 1997 (Exhibit 10.17 to 1997 10-K)
*10.21 Registration Rights Agreement between St. James Capital Partners, L.P. and the Company
dated as of January 24, 1997 (Exhibit 10.18 to 1997 10-K)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No report on Form 8-K was filed during the period from
December 1, 1997 to February 28, 1998.
(c) Exhibits
See Item 14(a)(3), above.
(d) Financial Statement Schedule
- 47 -
<PAGE> 48
SCHEDULE II
ACR GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 28, 1997 AND
FEBRUARY 29, 1996
<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, 1998:
Allowance for doubtful
accounts:
Accounts receivable $584,024 $832,515 $108,355(2) $762,185(1) $762,709
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
</TABLE>
(1) Accounts/notes and related allowance written off.
(2) Allowance related to accounts receivable of acquired companies.
- 48 -
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ACR GROUP, INC.
Date: May 29, 1998 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, May 29, 1998
- ------------------------------------- President and
Alex Trevino, Jr. Chief Executive Officer
(Principal executive officer)
/s/ Anthony R. Maresca Senior Vice President, May 29, 1998
- --------------------------------- Chief Financial Officer
Anthony R. Maresca and Director
(Principal financial and
accounting officer)
/s/ A. Stephen Trevino Director May 29, 1998
- -----------------------------------
A. Stephen Trevino
/s/ Ronald T. Nixon Director May 29, 1998
- -----------------------------------
Ronald T. Nixon
/s/ Roland H. St. Cyr Director May 29, 1998
- ------------------------------------
Roland H. St. Cyr
</TABLE>
- 49 -
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
* 3 .1 Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)
* 3 .2 Articles of Amendment to Articles of Incorporation (Exhibit 3.2 to 1993 10-K)
* 3 .3 Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)
* 3 .4 Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993 10-K)
* 4 .1 Specimen of Common Stock Certificate of ACR Group, Inc. (Exhibit 4.1 to 1993 10-K)
10.1 Employment Agreement between the Company and Alex Trevino, Jr. dated as of March 1,
1998
10.2 Stock Option Agreement between the Company and Alex Trevino, Jr. dated as of March 1,
1998
10.3 Employment Agreement between the Company and Anthony R. Maresca dated as of March 1,
1998
10.4 Stock Option Agreement between the Company and Anthony R. Maresca dated as of March 1,
1998
10.5 Registration Rights Agreement by and between the Company, Alex Trevino, Jr. and
Anthony R. Maresca
*10 .6 Note Agreement between The Catalyst Fund, Ltd., as Lender, and the Company, ACR
Supply, Inc., Fabricated Systems, Inc. and Heating and Cooling Supply, Inc., as
Borrowers, dated as of May 27, 1993 (Exhibit 10.18 to 1993 10-K)
10.7 First Amendment to Note Agreement by and among The Catalyst Fund, Ltd., the Company,
ACR Supply, Inc., Total Supply, Inc. f/k/a Fabricated Systems, Inc., Heating and
Cooling Supply, Inc. and West Coast HVAC Supply, Inc., dated as of April 14, 1997
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.8 Second Amendment and Restated Note Agreement by and between the Company, all
subsidiaries of the Company, The Catalyst Fund, Ltd., and Southwest/Catalyst Capital,
Ltd., dated as of January 28, 1998
10.9 Warrant for the Purchase of 750,000 Shares of Common Stock of the Company issued to
The Catalyst Fund, Ltd. dated January 28, 1998
10.10 Warrant for the Purchase of 50,000 Shares of Common Stock of the Company issued to The
Catalyst Fund, Ltd. dated January 28, 1998
10.11 Warrant for the Purchase of 125,000 Shares of Common Stock of the Company issued to
Southwest/Catalyst Capital, Ltd. dated January 28, 1998
10.12 Registration Rights Agreement between The Catalyst Fund, Ltd. and the Company dated as
of January 28, 1998
10.13 Registration Rights Agreement between Southwest/Catalyst Capital, Ltd. and the Company
dated as of January 28, 1998
*10 .14 Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated
as of August 27, 1997 (Exhibit 10.1 to August 31, 1997 10-Q)
*10 .15 First Amendment to Loan and Security Agreement by and between the Company and
NationsBank of Texas, N.A. dated as of September 9, 1997 (Exhibit 10.2 to August 31,
1997 10-Q)
*10 .16 Purchase Agreement by and among the Company, Richard O'Leary, Lifetime Filter, Inc.
and O'Leary Family Partnership, Ltd. (Exhibit 2.1 to Form 8-K dated January 24, 1997)
*10 .17 1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS 333-16325)
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
*10 .18 Agreement of Purchase and Sale by and between the Company and St. James Capital
Partners, L.P. dated as of January 24, 1997 (Exhibit 10.15 to 1997 10-K)
*10 .19 10% Convertible Promissory Note of the Company issued to St. James Capital Partners,
L.P. dated as of January 24, 1997 (Exhibit 10.16 to 1997 10-K)
*10 .20 Warrant to Purchase 280,000 Shares of Common Stock of the Company issued to St. James
Capital Partners, L.P. dated January 24, 1997 (Exhibit 10.17 to 1997 10-K)
*10 .21 Registration Rights Agreement between St. James Capital Partners, L.P. and the Company
dated as of January 24, 1997 (Exhibit 10.18 to 1997 10-K)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement), dated effective as of
March 1, 1998, is entered into by and between ACR Group, Inc., a Texas
corporation (the "Company"), and Alex Trevino, Jr. ("Employee").
ARTICLE I
Employee agrees to be employed by the Company, and the Company agrees
to employ Employee, as President and Chief Executive Officer of the Company, for
the purpose of performance by and on behalf of the Company of such services
commensurate with those positions as may be requested from time to time by the
Board of Directors of the Company. Should Employee give Cause (as hereinafter
defined) for termination, the Company may terminate Employee's employment at any
time thereafter by written notice thereof to Employee. After receipt of said
notice, Employee shall have ten (10) days to file a written reply that there is
no Cause of termination. Nothing contained herein, however, shall affect
Employee's right to receive benefits from policies of insurance or other
programs available to Employee by virtue of his employment by the Company.
ARTICLE II
During Employee's employment hereunder for a term (the "Term") from the
date first shown above and ending February 28, 2002, the Company shall pay and
provide to Employee the compensation and benefits set forth on Exhibit A,
attached hereto and incorporated herein for all purposes. Employer may terminate
this Agreement effective at the end of the Term by giving written notice of such
election at least two (2) years prior to the end of the Term. If Employer does
not elect to so terminate this Agreement, the Term of this Agreement shall be
extended automatically by an additional two (2) years. The provisions of the
preceding sentence shall thereafter continue in effect until Employer elects to
terminate this Agreement in the manner so provided.
ARTICLE III
Employee recognizes and agrees that the business of the Company and its
subsidiaries and their business interests require a confidential relationship
between it and its employees and the fullest practical protection and
confidential treatment of their trade secrets, trade practices, prospects,
transactions, customers and other knowledge of the business which will be or
have been conceived or developed by Employee during Employee's course of
employment with the Company. Accordingly, Employee agrees that during Employee's
term of employment with the Company and during the applicable period of the
non-competition provision described in Article IV hereof, Employee will:
<PAGE> 2
(i) Keep secret and confidential all such information, trade
secrets, trade practices, prospects, transactions, customer
lists, and business practices of the Company and its
subsidiaries;
(ii) Not use or aid others in using, directly or indirectly, the
same in competition with the Company or its subsidiaries,
unless required by a valid order of a court or other
governmental authority of competent jurisdiction; and
(iii) Other than on behalf of the Company's interest, not contact or
solicit the customers, employees, brokers, salesmen, investors
or competitors of the Company or its subsidiaries in any
manner which relates to any business engaged in by the Company
or its subsidiaries.
Employee further agrees that all inventions, ideas, prospects or
processes or other results of the efforts of Employee's employment by the
Company which are conceived, invented or developed, in whole or in part, by or
with the assistance of Employee during Employee's employment with the Company
shall be the sole and exclusive property of the Company, and Employee shall,
upon request by the Company at any time, execute such assignments of the same or
other similar documents in favor of the Company.
ARTICLE IV
In consideration of the compensation payable to Employee hereunder,
Employee agrees that, if Employee either voluntarily terminates his employment
with the Company or if the Company terminates Employee's employment for Cause
(but not if his employment is terminated by the Company without Cause), (i)
while he is employed by or receiving severance compensation from the Company,
Employee will not, directly or indirectly, operate, participate in, undertake
any employment with, advise or have any interest in any business enterprise
located or operating within any state in the United States in which the Company
or any of its subsidiaries is presently conducting business (the "Market Area"),
which is competitive with any business engaged in by the Company or any of its
subsidiaries at the time of Employee's termination of employment hereunder;
provided, however, that nothing set forth herein shall preclude Employee from
either undertaking employment with a business enterprise which conducts
business, both within the Market Area and outside the Market Area, which is
competitive with the Company or any of its subsidiaries, provided that none of
the duties to be performed by Employee pursuant to such employment shall,
directly or indirectly, relate to business activities of that business
enterprise conducted within the Market Area which are competitive with those of
the Company or any of its subsidiaries; and (ii) while he is employed by or
receiving severance compensation from the Company, and for a period of two (2)
years thereafter, Employee, his immediate family members and their respective
affiliates (as defined in Rule 144 promulgated under the Securities Act 1933, as
amended) will not, directly or indirectly, own or have any other financial
interest in any business enterprise located either within or outside the Market
Area which is competitive with any
2
<PAGE> 3
business engaged in by the Company or any of its subsidiaries at the time of
Employee's termination of employment hereunder. Notwithstanding the foregoing
provisions of this Article IV, Employee shall not be prohibited at any time from
having an indirect ownership interest, not exceeding one percent (1%) thereof,
in a business enterprise which is competitive with any business engaged in by
the Company or any of its subsidiaries, provided that the decision to acquire
such interest was not made by or upon the suggestion of Employee, a member of
his immediate family, or their respective affiliates.
Employee further agrees that during his term of employment hereunder he
will devote his full business time and best efforts to the business and affairs
of the Company.
Termination for "Cause", for purposes of this Agreement, is defined as
termination for any of the following reasons:
(i) If Employee has failed to perform any of his material
duties under this Agreement, breached any material provision of this
Agreement, or violated any statutory or common law duty of loyalty to
the Company or any of its subsidiaries;
(ii) If Employee has engaged in malfeasance, theft from the
Company or any of its subsidiaries, embezzlement or any other serious
and substantial crimes against the Company, or is convicted of a felony
involving moral turpitude;
(iii) If the Employee dies or becomes unable by reason of
physical disability or other incapacity to carry out or perform the
duties required of him hereunder for a continuous period of six (6)
months; or
(iv) If the earnings per share of the Company for any fiscal
year during the term of this Agreement is negative.
ARTICLE V
In the event that any dispute arises with respect to this Agreement,
including without limitation, a dispute as to whether Cause has occurred
permitting the Company to terminate Employee's employment hereunder, upon the
request of either Employee or the Company, whether made before or after the
institution of any legal proceeding filed with respect to such dispute, the
dispute shall be resolved by mandatory and binding arbitration administered by
the American Arbitration Association ("AAA") pursuant to the Federal Arbitration
Act (the "Act") in accordance herewith and the Commercial Arbitration Rules (the
"Rules") of the AAA. If the Act is inapplicable to any such claim or controversy
for any reason, such arbitration shall be conducted pursuant to the Texas
General Arbitration Act and in accordance with the Rules. Judgment upon the
award rendered by the arbitrators may be entered in and enforced by any court
having jurisdiction and in accordance with the practice of such court. All
statutes of limitation that
3
<PAGE> 4
would otherwise be applicable shall apply to any arbitration proceeding. Any
attorney-client privilege and other protection against disclosure of
confidential information, including, without limitation, any protection afforded
the work-product of any attorney, that could otherwise be claimed by any party
shall be available to and may be claimed by any such party in any arbitration
proceeding. No party waives any attorney-client privilege or any other
protection against disclosure of confidential information by reason of anything
contained in or done pursuant to or in connection with this arbitration
provision. Any arbitration proceeding shall be conducted in Harris County, Texas
by a panel of three arbitrators.
ARTICLE VI
Employee and the Company hereby agree and acknowledge that damages are
an inadequate remedy at law for the breach of the terms hereof and, accordingly,
the Company is hereby granted and shall have the right of injunction and such
other and further relief, both in law and in equity, as the Company may be
entitled to receive under the laws of the State of Texas, in the event Employee
breaches or threatens to breach any of the covenants or agreements contained
herein. In the event any provisions hereof shall be modified or held ineffective
by any Court in any respect, such adjudication shall not invalidate or render
ineffective the balance of the provisions hereof, and the provisions hereof
shall be enforced to the maximum extent allowed by law. This Agreement shall be
governed by the laws of the State of Texas and shall be enforceable in Harris
County, Texas. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, assigns, heirs and personal
representatives. The parties hereto have read the terms and conditions of this
Agreement before signing the same, and hereby agree that no statement, agreement
or understanding, whether oral or written, not contained herein will be
recognized or enforced. This Agreement may not be amended except by a written
agreement executed by the Company and Employee which makes specific reference to
this Agreement. This Agreement, along with its exhibits and attachments,
supersedes any and all other agreements, whether written or oral, between the
Company and Employee relating to the employment of Employee by the Company.
There shall be no right of set-off or counterclaim in respect of any claim, debt
or obligation, against any payments to Employee, his dependents, beneficiaries
or estate provided for in this Agreement.
ARTICLE VII
All notices, demands, requests and communications ("Notices") given or
required to be given by the Company to Employee or by Employee to the Company,
shall be in writing. All Notices by the Company to Employee shall be deemed to
have been properly given if sent by personal delivery, telecopy delivery or U.S.
registered or certified mail, postage prepaid, addressed to Employee at 3200
Wilcrest, Suite 440, Houston, Texas 77042, or to such other address as Employee
may from time to time designate by written notice to the Company given as herein
required. Any payment by the Company to Employee may be made by check mailed to
his
4
<PAGE> 5
last such designated address. All Notices by Employee to the Company shall be
deemed to have been properly given if sent by personal delivery, telecopy
delivery or U.S. registered or certified mail, postage prepaid, addressed to the
Company at 3200 Wilcrest, Suite 440, Houston, Texas 77042, or to such other
address as the Company may from time to time designate by written notice to
Employee given as herein required. Notices given in the manner aforesaid shall
be deemed sufficiently served or given for all purposes hereunder at the time
such Notice was received by the addressee if such Notice is sent by personal or
telecopy delivery or when deposited in a post office or branch post office
regularly maintained by the U.S. Government.
IN WITNESS WHEREOF, the undersigned have set their hands effective as
of the 1st day of March, 1998.
ACR GROUP, INC.
By: /s/ Anthony R. Maresca
---------------------------------
"Company"
/s/ Alex Trevino, Jr.
------------------------------------
Alex Trevino, Jr.
"Employee"
5
<PAGE> 6
EXHIBIT A
TO
EMPLOYMENT AGREEMENT
BETWEEN ACR GROUP, INC. AND ALEX TREVINO, JR.
1. Annual Salary. The Company shall pay to Employee a salary of $225,000
per annum ("Base Salary") payable in accordance with the Company's
regular payroll practices. The Board of Directors of the Company shall
review the salary of Employee annually, and increase (but not decrease)
such salary from time to time as it may deem appropriate.
2. Bonus. The Board of Directors of the Company shall approve a forecasted
earnings per share on a fully diluted basis ("Forecast E.P.S.") for the
Company's Common Stock with respect to each fiscal year of the Company
during the Term. No bonus shall be earned by Employee in respect of a
fiscal year if the Forecast E.P.S. is not attained. If the actual
earnings per share on a fully diluted basis ("Actual E.P.S.") for the
Company's Common Stock for a fiscal year equals or exceeds the Forecast
E.P.S. for such fiscal year, the Company shall pay Employee a bonus
equal to the sum of (i) $25,000, and (ii) the amount determined by the
following formula:
(Actual E.P.S. - Forecast E.P.S.)
Bonus = --------------------------------- x Base Salary
Forecast E.P.S.
Such bonus payments shall be paid to Employee on or before the later of
(i) ninety (90) days after the end of the applicable fiscal year of the
Company, or (ii) five (5) days after the independent auditor for the
Company issues its opinion as to the Company's financial statements for
such fiscal year; provided, however, in no event shall such payment be
delayed beyond one hundred twenty (120) days after the end of the
fiscal year.
3. Stock Options. The Company hereby grants to Employee options
("Options") to acquire 300,000 shares of the Company's Common Stock,
subject to the terms and conditions of the Stock Option Agreement
attached hereto as Exhibit A-1.
4. Reimbursements. The Company shall reimburse Employee for all authorized
expenses incurred or paid by Employee in connection with the
performance of Employee's services under this Agreement upon
presentation of expense statements or vouchers and such other
supporting information as the Company may from time to time require or
request.
5. Automobile. During the term of this Agreement, the Company shall permit
Employee to continue to use the automobile owned or leased by the
Company presently being used by Employee, and shall reimburse Employee
for all costs incurred by him in the operation of such automobile. From
time to time during the Term, the Company shall purchase or lease
comparable replacement vehicles for use by Employee in a manner
reasonably consistent with its prior practice in respect thereof.
(i)
<PAGE> 7
6. Membership Dues. During the term of this Agreement, the Company will
pay or reimburse Employee for the monthly dues charged for membership
in a health club selected by Employee.
7. Other Benefits. The Company shall provide to Employee all other
benefits which are generally available to other employees of the
Company, which may include, without limitation, hospitalization and
401(k) contributions. In the event that the Company, at some future
time, provides no group insurance coverage, the Company will reimburse
Employee for the cost of insurance coverage for Employee comparable to
the insurance coverage now maintained by the Company for Employee.
8. Termination of Employee Without Cause. In the event that this Agreement
is terminated without Cause, Employee shall be paid or provided all
compensation and benefits to which he is entitled under this Agreement,
including salary, bonuses, stock options, use of automobile and
reimbursement of operating costs thereof, club membership dues, and all
other benefits, through the expiration of the Term. Notwithstanding the
foregoing, in the event that the Company is a party to a merger,
consolidation or reorganization with one or more other entities in
which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another person or
entity, in a transaction approved by the Board of Directors of the
Company, and, in connection therewith or subsequent thereto, this
Agreement is terminated without Cause, the only compensation and
benefits which Employee shall be entitled to receive pursuant to this
Paragraph 8 shall be his Base Salary in effect upon the termination of
employment which shall be paid for the two-year period following such
termination.
9. Allocation. The Company and Employee recognize and agree that 15% of
the above described compensation and benefits shall be allocated to the
covenants of Employee contained in Articles III and IV of the
Agreement.
(ii)
<PAGE> 8
EXHIBIT A-1
ACR GROUP, INC.
STOCK OPTION AGREEMENT
300,000 SHARES
This Stock Option Agreement (this "Agreement") is entered into by and
between ACR Group, Inc., a Texas corporation (the "Company"), and Alex Trevino,
Jr. ("Optionee") effective as of March 1, 1998, upon the following terms and
conditions:
1. Grant of Stock Option. The Company hereby grants to the Optionee
options (the "Options") to purchase from the Company 300,000 shares of the
Company's authorized and unissued common stock, par value $.01 per share
("Stock") at an exercise price of $2.24 per share (the "Exercise Price").
2. Term. The Options granted herein may be exercised in whole or in
part during the period beginning March 1, 2006. Notwithstanding the foregoing,
all or a portion of the Options may become exercisable at an earlier date, as
follows:
(a) Options covering 75,000 shares of Stock shall become first
exercisable upon and after the date which the Market Price (as
hereinafter defined) of the Stock has been equal to or greater than
$3.24 for ten (10) consecutive trading days;
(b) Options covering an additional 75,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $4.24 for ten (10)
consecutive trading days;
(c) Options covering an additional 75,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $5.24 for ten (10)
consecutive trading days; and
(d) Options covering the final 75,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $6.24 for ten (10)
consecutive trading days.
Upon the vesting of all or any portion of the Options on March 1, 2006,
or earlier, as hereinabove provided, the Options so vested may be exercised in
whole or in part and from time to time during the four (4) year period
commencing on the date of vesting of such Options.
The term "Market Price" as used herein shall mean the price of the
Stock determined as follows: (i) the last reported sale price for the Stock on
such day on the principal securities exchange on which the Stock is listed or
admitted to trading or if no such sale takes place on such
<PAGE> 9
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 for the 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 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; or (ii) if the Stock shall not be listed or admitted to trading as
provided in clause (i) above, the fair market value of the Stock as determined
in good faith by the Board of Directors of the Company. Upon the occurrence of
an event or transaction described in subparagraph 7(b) hereof, Market Price
shall mean the greater of (i) the price of the Stock as determined in the
preceding sentence, or (ii) the fair market value of the consideration received
by the holders of Stock of the Company in respect of one (1) share of Stock as a
result of such event or transaction, as determined in good faith by the Board of
Directors of the Company with respect to such consideration or portion thereof
consisting of securities or property other than cash.
4. Restrictions on Right to Exercise Stock Options.
(a) In no event shall the Company be required to transfer
fractional shares to the Optionee.
(b) In the event that the Optionee's status as an employee of
the Company shall be (i) voluntarily terminated by the Optionee or (ii)
terminated by the Company for Cause as defined in that certain Employment
Agreement between the Company and Optionee dated effective as of March 1, 1998,
all Options granted hereunder shall terminate ninety (90) days from the date on
which the Optionee ceases to be an employee of the Company.
(c) No Option shall be exercisable unless the shares issuable
on the exercise thereof shall have been registered under the Securities Act of
1933 and applicable state securities laws, or the Company shall have first
received the opinion of its counsel that registration under such laws is not
required in connection with such issuance. At the time of exercise, if the
shares of Stock with respect to which Options are being exercised have not been
registered under such laws, the Company may require the Optionee to give the
Company whatever written assurance counsel for the Company may require that the
shares of Stock are being acquired for investment and not with a view to the
distribution thereof, and that the shares will not be disposed of without the
written opinion of such counsel that registration under such laws is not
required. Share certificates for Stock issued to the Optionee upon exercise of
Options shall bear a legend to the foregoing effect to the extent counsel for
the Company deems it advisable.
5. Limitations Upon Transfer. The Options and all other rights granted
hereunder shall be exercised only by the Optionee, and the Options and all
rights granted hereunder shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), except by
will or by the laws of descent and distribution. The Options and all rights
granted hereby shall not be subject to execution, attachment or similar process.
Upon any attempt
2
<PAGE> 10
to transfer, assign, pledge, hypothecate or otherwise dispose of such Options or
any of such rights contrary to the provisions hereof, or upon levy of any
attachment or similar process upon such Options or such rights, such Options and
such rights shall immediately become null and void. Upon the death of the
Optionee, all unexercised Options shall be transferred to the Optionee's estate
and shall be entitled to be exercised in accordance with the terms hereof.
6. Method of Exercise. Any exercise of Options shall be by written
notice delivered by the Optionee to the Company, which written notice of
exercise shall be accompanied by the aggregate purchase price for the shares
with respect to which Options are being exercised. The purchase price of shares
of Stock of the Company acquired upon the exercise of Options shall be paid by
the Optionee in cash. The Company shall issue the shares of Stock covered by any
such notice to the Optionee as soon as practicable after receiving such notice
and the payment for the shares of Stock to be issued. All federal and state
stock transfer taxes, if any, on the issuance and sale of such shares of Stock
by the Company to the Optionee shall be borne and paid by the Optionee. The
Optionee shall not be, nor have any rights or privileges of, a shareholder of
the Company in respect of any of the shares issuable upon the exercise of
Options until certificates representing such shares of Stock shall have been
issued and delivered to the Optionee.
7. Adjustments.
(a) Subject to any required action by the Company's Board of
Directors or shareholders, the number of shares of Stock provided for in this
Agreement and the price per share thereof shall be proportionately adjusted for
any increase or decrease in the number of issued shares of the Stock resulting
from a subdivision or consolidation of shares or the payment of a stock dividend
(but only on the Stock) or any other increase or decrease in the number of such
shares effected without receipt of consideration by the Company.
(b) In the event of (i) a dissolution or liquidation of the
Company, (ii) a consolidation or merger in which the shareholders of the Company
immediately prior to the merger or consolidation do not, immediately following
any such consolidation or merger, own sufficient shares of the voting stock of
the surviving corporation to elect a majority of the board of directors of the
surviving corporation, (iii) a sale of all or substantially all of the assets of
the Company, or (iv) a sale of at least a majority of the outstanding Stock of
the Company to one purchaser, then this Agreement shall terminate; provided,
however, that in any such event, the Optionee shall have the right immediately
prior to any such event to exercise all Options which shall have become vested
pursuant to Paragraph 2 hereof.
(c) Except as expressly provided in this Agreement, the
Optionee shall have no rights by reason of any subdivision or consolidation of
shares of stock of any class, payment of any shares of any class, or by reason
of any dissolution or liquidation, merger or consolidation, sale of all or
substantially all of the assets of the Company, sale of a majority of the
outstanding common stock of the Company, or the spinoff of assets or stock of
another corporation.
3
<PAGE> 11
(d) Any issue by the Company of shares of capital stock of any
class, or securities convertible into shares of capital stock of any class,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares of the Company's Stock subject to this
Agreement. The grant of Options pursuant to this Agreement shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve, liquidate, or sell or transfer all
or any part of its business or assets.
8. Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the Company and the Optionee and their respective heirs, legal
representatives, successors and assigns. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, this Agreement has been executed and entered into
effective as of the date first above set forth.
ACR GROUP, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
OPTIONEE:
--------------------------------
Alex Trevino, Jr.
4
<PAGE> 1
EXHIBIT 10.2
ACR GROUP, INC.
STOCK OPTION AGREEMENT
300,000 SHARES
This Stock Option Agreement (this "Agreement") is entered into by and
between ACR Group, Inc., a Texas corporation (the "Company"), and Alex Trevino,
Jr. ("Optionee") effective as of March 1, 1998, upon the following terms and
conditions:
1. Grant of Stock Option. The Company hereby grants to the Optionee
options (the "Options") to purchase from the Company 300,000 shares of the
Company's authorized and unissued common stock, par value $.01 per share
("Stock") at an exercise price of $2.24 per share (the "Exercise Price").
2. Term. The Options granted herein may be exercised in whole or in
part during the period beginning March 1, 2006. Notwithstanding the foregoing,
all or a portion of the Options may become exercisable at an earlier date, as
follows:
(a) Options covering 75,000 shares of Stock shall become first
exercisable upon and after the date which the Market Price (as
hereinafter defined) of the Stock has been equal to or greater than
$3.24 for ten (10) consecutive trading days;
(b) Options covering an additional 75,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $4.24 for ten (10)
consecutive trading days;
(c) Options covering an additional 75,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $5.24 for ten (10)
consecutive trading days; and
(d) Options covering the final 75,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $6.24 for ten (10)
consecutive trading days.
Upon the vesting of all or any portion of the Options on March 1, 2006,
or earlier, as hereinabove provided, the Options so vested may be exercised in
whole or in part and from time to time during the four (4) year period
commencing on the date of vesting of such Options.
The term "Market Price" as used herein shall mean the price of the
Stock determined as follows: (i) the last reported sale price for the Stock on
such day on the principal securities exchange on which the 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
for the Stock on the National Association of Securities Dealers SmallCap Market
on such date, or, if there shall have
<PAGE> 2
been no trading on such date or if the 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; or (ii) if the Stock shall not be listed or admitted to
trading as provided in clause (i) above, the fair market value of the Stock as
determined in good faith by the Board of Directors of the Company. Upon the
occurrence of an event or transaction described in subparagraph 7(b) hereof,
Market Price shall mean the greater of (i) the price of the Stock as determined
in the preceding sentence, or (ii) the fair market value of the consideration
received by the holders of Stock of the Company in respect of one (1) share of
Stock as a result of such event or transaction, as determined in good faith by
the Board of Directors of the Company with respect to such consideration or
portion thereof consisting of securities or property other than cash.
4. Restrictions on Right to Exercise Stock Options.
(a) In no event shall the Company be required to transfer
fractional shares to the Optionee.
(b) In the event that the Optionee's status as an employee of
the Company shall be (i) voluntarily terminated by the Optionee or (ii)
terminated by the Company for Cause as defined in that certain Employment
Agreement between the Company and Optionee dated effective as of March 1, 1998,
all Options granted hereunder shall terminate ninety (90) days from the date on
which the Optionee ceases to be an employee of the Company.
(c) No Option shall be exercisable unless the shares issuable
on the exercise thereof shall have been registered under the Securities Act of
1933 and applicable state securities laws, or the Company shall have first
received the opinion of its counsel that registration under such laws is not
required in connection with such issuance. At the time of exercise, if the
shares of Stock with respect to which Options are being exercised have not been
registered under such laws, the Company may require the Optionee to give the
Company whatever written assurance counsel for the Company may require that the
shares of Stock are being acquired for investment and not with a view to the
distribution thereof, and that the shares will not be disposed of without the
written opinion of such counsel that registration under such laws is not
required. Share certificates for Stock issued to the Optionee upon exercise of
Options shall bear a legend to the foregoing effect to the extent counsel for
the Company deems it advisable.
5. Limitations Upon Transfer. The Options and all other rights
granted hereunder shall be exercised only by the Optionee, and the Options and
all rights granted hereunder shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), except by
will or by the laws of descent and distribution. The Options and all rights
granted hereby shall not be subject to execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of such Options or any of such rights contrary to the provisions hereof, or upon
levy of any attachment or similar process upon such Options or such rights, such
Options and such rights shall immediately become null and void.
2
<PAGE> 3
Upon the death of the Optionee, all unexercised Options shall be transferred to
the Optionee's estate and shall be entitled to be exercised in accordance with
the terms hereof.
6. Method of Exercise. Any exercise of Options shall be by written
notice delivered by the Optionee to the Company, which written notice of
exercise shall be accompanied by the aggregate purchase price for the shares
with respect to which Options are being exercised. The purchase price of shares
of Stock of the Company acquired upon the exercise of Options shall be paid by
the Optionee in cash. The Company shall issue the shares of Stock covered by any
such notice to the Optionee as soon as practicable after receiving such notice
and the payment for the shares of Stock to be issued. All federal and state
stock transfer taxes, if any, on the issuance and sale of such shares of Stock
by the Company to the Optionee shall be borne and paid by the Optionee. The
Optionee shall not be, nor have any rights or privileges of, a shareholder of
the Company in respect of any of the shares issuable upon the exercise of
Options until certificates representing such shares of Stock shall have been
issued and delivered to the Optionee.
7. Adjustments.
(a) Subject to any required action by the Company's Board of
Directors or shareholders, the number of shares of Stock provided for in this
Agreement and the price per share thereof shall be proportionately adjusted for
any increase or decrease in the number of issued shares of the Stock resulting
from a subdivision or consolidation of shares or the payment of a stock dividend
(but only on the Stock) or any other increase or decrease in the number of such
shares effected without receipt of consideration by the Company.
(b) In the event of (i) a dissolution or liquidation of the
Company, (ii) a consolidation or merger in which the shareholders of the Company
immediately prior to the merger or consolidation do not, immediately following
any such consolidation or merger, own sufficient shares of the voting stock of
the surviving corporation to elect a majority of the board of directors of the
surviving corporation, (iii) a sale of all or substantially all of the assets of
the Company, or (iv) a sale of at least a majority of the outstanding Stock of
the Company to one purchaser, then this Agreement shall terminate; provided,
however, that in any such event, the Optionee shall have the right immediately
prior to any such event to exercise all Options which shall have become vested
pursuant to Paragraph 2 hereof.
(c) Except as expressly provided in this Agreement, the
Optionee shall have no rights by reason of any subdivision or consolidation of
shares of stock of any class, payment of any shares of any class, or by reason
of any dissolution or liquidation, merger or consolidation, sale of all or
substantially all of the assets of the Company, sale of a majority of the
outstanding common stock of the Company, or the spinoff of assets or stock of
another corporation.
(d) Any issue by the Company of shares of capital stock of any
class, or securities convertible into shares of capital stock of any class,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares of the Company's
3
<PAGE> 4
Stock subject to this Agreement. The grant of Options pursuant to this Agreement
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, or sell or
transfer all or any part of its business or assets.
8. Miscellaneous. This Agreement shall inure to the benefit of and
be binding upon the Company and the Optionee and their respective heirs, legal
representatives, successors and assigns. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, this Agreement has been executed and entered into
effective as of the date first above set forth.
ACR GROUP, INC.
By: /s/ Anthony R. Maresca
----------------------------
Name: Anthony R. Maresca
Title: Senior Vice President
OPTIONEE:
/s/ Alex Trevino, Jr.
-------------------------------
Alex Trevino, Jr.
4
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement), dated effective as of
March 1, 1998, is entered into by and between ACR Group, Inc., a Texas
corporation (the "Company"), and Anthony R. Maresca ("Employee").
ARTICLE I
Employee agrees to be employed by the Company, and the Company agrees
to employ Employee, as President and Chief Financial Officer of the Company, for
the purpose of performance by and on behalf of the Company of such services
commensurate with those positions as may be requested from time to time by the
Board of Directors of the Company. Should Employee give Cause (as hereinafter
defined) for termination, the Company may terminate Employee's employment at any
time thereafter by written notice thereof to Employee. After receipt of said
notice, Employee shall have ten (10) days to file a written reply that there is
no Cause of termination. Nothing contained herein, however, shall affect
Employee's right to receive benefits from policies of insurance or other
programs available to Employee by virtue of his employment by the Company.
ARTICLE II
During Employee's employment hereunder for a term (the "Term") from the
date first shown above and ending February 28, 2002, the Company shall pay and
provide to Employee the compensation and benefits set forth on Exhibit A,
attached hereto and incorporated herein for all purposes. Employer may terminate
this Agreement effective at the end of the Term by giving written notice of such
election at least two (2) years prior to the end of the Term. If Employer does
not elect to so terminate this Agreement, the Term of this Agreement shall be
extended automatically by an additional two (2) years. The provisions of the
preceding sentence shall thereafter continue in effect until Employer elects to
terminate this Agreement in the manner so provided.
ARTICLE III
Employee recognizes and agrees that the business of the Company and its
subsidiaries and their business interests require a confidential relationship
between it and its employees and the fullest practical protection and
confidential treatment of their trade secrets, trade practices, prospects,
transactions, customers and other knowledge of the business which will be or
have been conceived or developed by Employee during Employee's course of
employment with the Company. Accordingly, Employee agrees that during Employee's
term of employment with the Company and during the applicable period of the
non-competition provision described in Article IV hereof, Employee will:
<PAGE> 2
(i) Keep secret and confidential all such information, trade
secrets, trade practices, prospects, transactions, customer
lists, and business practices of the Company and its
subsidiaries;
(ii) Not use or aid others in using, directly or indirectly, the
same in competition with the Company or its subsidiaries,
unless required by a valid order of a court or other
governmental authority of competent jurisdiction; and
(iii) Other than on behalf of the Company's interest, not contact or
solicit the customers, employees, brokers, salesmen, investors
or competitors of the Company or its subsidiaries in any
manner which relates to any business engaged in by the Company
or its subsidiaries.
Employee further agrees that all inventions, ideas, prospects or
processes or other results of the efforts of Employee's employment by the
Company which are conceived, invented or developed, in whole or in part, by or
with the assistance of Employee during Employee's employment with the Company
shall be the sole and exclusive property of the Company, and Employee shall,
upon request by the Company at any time, execute such assignments of the same or
other similar documents in favor of the Company.
ARTICLE IV
In consideration of the compensation payable to Employee hereunder,
Employee agrees that, if Employee either voluntarily terminates his employment
with the Company or if the Company terminates Employee's employment for Cause
(but not if his employment is terminated by the Company without Cause), (i)
while he is employed by or receiving severance compensation from the Company,
Employee will not, directly or indirectly, operate, participate in, undertake
any employment with, advise or have any interest in any business enterprise
located or operating within any state in the United States in which the Company
or any of its subsidiaries is presently conducting business (the "Market Area"),
which is competitive with any business engaged in by the Company or any of its
subsidiaries at the time of Employee's termination of employment hereunder;
provided, however, that nothing set forth herein shall preclude Employee from
either undertaking employment with a business enterprise which conducts
business, both within the Market Area and outside the Market Area, which is
competitive with the Company or any of its subsidiaries, provided that none of
the duties to be performed by Employee pursuant to such employment shall,
directly or indirectly, relate to business activities of that business
enterprise conducted within the Market Area which are competitive with those of
the Company or any of its subsidiaries; and (ii) while he is employed by or
receiving severance compensation from the Company, and for a period of two (2)
years thereafter, Employee, his immediate family members and their respective
affiliates (as defined in Rule 144 promulgated under the Securities Act 1933, as
amended) will not, directly or indirectly, own or have any other financial
interest in any business enterprise located either within or outside the Market
Area which is competitive with any
2
<PAGE> 3
business engaged in by the Company or any of its subsidiaries at the time of
Employee's termination of employment hereunder. Notwithstanding the foregoing
provisions of this Article IV, Employee shall not be prohibited at any time from
having an indirect ownership interest, not exceeding one percent (1%) thereof,
in a business enterprise which is competitive with any business engaged in by
the Company or any of its subsidiaries, provided that the decision to acquire
such interest was not made by or upon the suggestion of Employee, a member of
his immediate family, or their respective affiliates.
Employee further agrees that during his term of employment hereunder he
will devote his full business time and best efforts to the business and affairs
of the Company.
Termination for "Cause", for purposes of this Agreement, is defined as
termination for any of the following reasons:
(i) If Employee has failed to perform any of his material
duties under this Agreement, breached any material provision of this
Agreement, or violated any statutory or common law duty of loyalty to
the Company or any of its subsidiaries;
(ii) If Employee has engaged in malfeasance, theft from the
Company or any of its subsidiaries, embezzlement or any other serious
and substantial crimes against the Company, or is convicted of a felony
involving moral turpitude;
(iii) If the Employee dies or becomes unable by reason of
physical disability or other incapacity to carry out or perform the
duties required of him hereunder for a continuous period of six (6)
months; or
(iv) If the earnings per share of the Company for any fiscal
year during the term of this Agreement is negative.
ARTICLE V
In the event that any dispute arises with respect to this Agreement,
including without limitation, a dispute as to whether Cause has occurred
permitting the Company to terminate Employee's employment hereunder, upon the
request of either Employee or the Company, whether made before or after the
institution of any legal proceeding filed with respect to such dispute, the
dispute shall be resolved by mandatory and binding arbitration administered by
the American Arbitration Association ("AAA") pursuant to the Federal Arbitration
Act (the "Act") in accordance herewith and the Commercial Arbitration Rules (the
"Rules") of the AAA. If the Act is inapplicable to any such claim or controversy
for any reason, such arbitration shall be conducted pursuant to the Texas
General Arbitration Act and in accordance with the Rules. Judgment upon the
award rendered by the arbitrators may be entered in and enforced by any court
having jurisdiction and in accordance with the practice of such court. All
statutes of limitation that
3
<PAGE> 4
would otherwise be applicable shall apply to any arbitration proceeding. Any
attorney-client privilege and other protection against disclosure of
confidential information, including, without limitation, any protection afforded
the work-product of any attorney, that could otherwise be claimed by any party
shall be available to and may be claimed by any such party in any arbitration
proceeding. No party waives any attorney-client privilege or any other
protection against disclosure of confidential information by reason of anything
contained in or done pursuant to or in connection with this arbitration
provision. Any arbitration proceeding shall be conducted in Harris County, Texas
by a panel of three arbitrators.
ARTICLE VI
Employee and the Company hereby agree and acknowledge that damages are
an inadequate remedy at law for the breach of the terms hereof and,
accordingly, the Company is hereby granted and shall have the right of
injunction and such other and further relief, both in law and in equity, as the
Company may be entitled to receive under the laws of the State of Texas, in the
event Employee breaches or threatens to breach any of the covenants or
agreements contained herein. In the event any provisions hereof shall be
modified or held ineffective by any Court in any respect, such adjudication
shall not invalidate or render ineffective the balance of the provisions hereof,
and the provisions hereof shall be enforced to the maximum extent allowed by
law. This Agreement shall be governed by the laws of the State of Texas and
shall be enforceable in Harris County, Texas. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, assigns, heirs and personal representatives. The parties hereto have
read the terms and conditions of this Agreement before signing the same, and
hereby agree that no statement, agreement or understanding, whether oral or
written, not contained herein will be recognized or enforced. This Agreement may
not be amended except by a written agreement executed by the Company and
Employee which makes specific reference to this Agreement. This Agreement, along
with its exhibits and attachments, supersedes any and all other agreements,
whether written or oral, between the Company and Employee relating to the
employment of Employee by the Company. There shall be no right of set-off or
counterclaim in respect of any claim, debt or obligation, against any payments
to Employee, his dependents, beneficiaries or estate provided for in this
Agreement.
ARTICLE VII
All notices, demands, requests and communications ("Notices") given or
required to be given by the Company to Employee or by Employee to the Company,
shall be in writing. All Notices by the Company to Employee shall be deemed to
have been properly given if sent by personal delivery, telecopy delivery or U.S.
registered or certified mail, postage prepaid, addressed to Employee at 3200
Wilcrest, Suite 440, Houston, Texas 77042, or to such other address as Employee
may from time to time designate by written notice to the Company given as herein
required. Any payment by the Company to Employee may be made by check mailed to
his
4
<PAGE> 5
last such designated address. All Notices by Employee to the Company shall be
deemed to have been properly given if sent by personal delivery, telecopy
delivery or U.S. registered or certified mail, postage prepaid, addressed to the
Company at 3200 Wilcrest, Suite 440, Houston, Texas 77042, or to such other
address as the Company may from time to time designate by written notice to
Employee given as herein required. Notices given in the manner aforesaid shall
be deemed sufficiently served or given for all purposes hereunder at the time
such Notice was received by the addressee if such Notice is sent by personal or
telecopy delivery or when deposited in a post office or branch post office
regularly maintained by the U.S. Government.
IN WITNESS WHEREOF, the undersigned have set their hands effective as
of the 1st day of March, 1998.
ACR GROUP, INC.
By: /s/ Alex Trevino, Jr.
-----------------------------------
"Company"
/s/ Anthony R. Maresca
---------------------------------------
Anthony R. Maresca
"Employee"
5
<PAGE> 6
EXHIBIT A
TO
EMPLOYMENT AGREEMENT
BETWEEN ACR GROUP, INC. AND ANTHONY R. MARESCA
1. Annual Salary. The Company shall pay to Employee a salary of $125,000
per annum ("Base Salary") payable in accordance with the Company's
regular payroll practices. The Board of Directors of the Company shall
review the salary of Employee annually, and increase (but not decrease)
such salary from time to time as it may deem appropriate.
2. Bonus. The Board of Directors of the Company shall approve a forecasted
earnings per share on a fully diluted basis ("Forecast E.P.S.") for the
Company's Common Stock with respect to each fiscal year of the Company
during the Term. No bonus shall be earned by Employee in respect of a
fiscal year if the Forecast E.P.S. is not attained. If the actual
earnings per share on a fully diluted basis ("Actual E.P.S.") for the
Company's Common Stock for a fiscal year equals or exceeds the Forecast
E.P.S. for such fiscal year, the Company shall pay Employee a bonus
equal to the sum of (i) $25,000, and (ii) the amount determined by the
following formula:
(Actual E.P.S. - Forecast E.P.S.) x Base Salary
Bonus = -------------------------------
Forecast E.P.S.
Such bonus payments shall be paid to Employee on or before the later of
(i) ninety (90) days after the end of the applicable fiscal year of the
Company, or (ii) five (5) days after the independent auditor for the
Company issues its opinion as to the Company's financial statements for
such fiscal year; provided, however, in no event shall such payment be
delayed beyond one hundred twenty (120) days after the end of the
fiscal year.
3. Stock Options. The Company hereby grants to Employee options
("Options") to acquire 100,000 shares of the Company's Common Stock,
subject to the terms and conditions of the Stock Option Agreement
attached hereto as Exhibit A-1.
4. Reimbursements. The Company shall reimburse Employee for all authorized
expenses incurred or paid by Employee in connection with the
performance of Employee's services under this Agreement upon
presentation of expense statements or vouchers and such other
supporting information as the Company may from time to time require or
request.
5. Automobile. During the term of this Agreement, the Company shall permit
Employee to continue to use the automobile owned or leased by the
Company presently being used by Employee, and shall reimburse Employee
for all costs incurred by him in the operation of such automobile. From
time to time during the Term, the Company shall purchase or lease
comparable replacement vehicles for use by Employee in a manner
reasonably consistent with its prior practice in respect thereof.
(i)
<PAGE> 7
6. Membership Dues. During the term of this Agreement, the Company will
pay or reimburse Employee for the monthly dues charged for membership
in a health club selected by Employee.
7. Other Benefits. The Company shall provide to Employee all other
benefits which are generally available to other employees of the
Company, which may include, without limitation, hospitalization and
401(k) contributions. In the event that the Company, at some future
time, provides no group insurance coverage, the Company will reimburse
Employee for the cost of insurance coverage for Employee comparable to
the insurance coverage now maintained by the Company for Employee.
8. Termination of Employee Without Cause. In the event that this Agreement
is terminated without Cause, Employee shall be paid or provided all
compensation and benefits to which he is entitled under this Agreement,
including salary, bonuses, stock options, use of automobile and
reimbursement of operating costs thereof, club membership dues, and all
other benefits, through the expiration of the Term. Notwithstanding the
foregoing, in the event that the Company is a party to a merger,
consolidation or reorganization with one or more other entities in
which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another person or
entity, in a transaction approved by the Board of Directors of the
Company, and, in connection therewith or subsequent thereto, this
Agreement is terminated without Cause, the only compensation and
benefits which Employee shall be entitled to receive pursuant to this
Paragraph 8 shall be his Base Salary in effect upon the termination of
employment which shall be paid for the two-year period following such
termination.
9. Allocation. The Company and Employee recognize and agree that 15% of
the above described compensation and benefits shall be allocated to the
covenants of Employee contained in Articles III and IV of the
Agreement.
(ii)
<PAGE> 8
EXHIBIT A-1
ACR GROUP, INC.
STOCK OPTION AGREEMENT
100,000 SHARES
This Stock Option Agreement (this "Agreement") is entered into by and
between ACR Group, Inc., a Texas corporation (the "Company"), and Anthony R.
Maresca ("Optionee") effective as of March 1, 1998, upon the following terms
and conditions:
1. Grant of Stock Option. The Company hereby grants to the Optionee
options (the "Options") to purchase from the Company 100,000 shares of the
Company's authorized and unissued common stock, par value $.01 per share
("Stock") at an exercise price of $2.24 per share (the "Exercise Price").
2. Term. The Options granted herein may be exercised in whole or in part
during the period or in part during the period beginning March 1, 2006.
Notwithstanding the foregoing, all or a portion of the Options may become
exercisable at an earlier date, as follows:
(a) Options covering 25,000 shares of Stock shall become first
exercisable upon and after the date which the Market Price (as
hereinafter defined) of the Stock has been equal to or greater than $3.24
for ten (10) consecutive trading days;
(b) Options covering an additional 25,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of the
Stock has been equal to or greater than $4.24 for ten (10) consecutive
trading days; and
(c) Options covering an additional 25,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of the
Stock has been equal to or greater than $5.24 for ten (10) consecutive
trading days; and
(d) Options covering an additional 25,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of the
Stock has been equal to or greater than $6.24 for ten (10) consecutive
trading days.
Upon the vesting of all or any portion of the Options on March 1, 2006, or
earlier, as hereinabove provided, the Options so vested may be exercised in
whole or in part and from time to time during the four (4) year period
commencing on the date of vesting of such Options.
The term "Market Price" as used herein shall mean the price of the Stock
determined as follows: (i) the last reported sale price for the Stock on such
day on the principal securities exchange on which the Stock is listed or
admitted to trading or if no such sale takes place on such
<PAGE> 9
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 for the 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 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; or (ii) if the Stock shall not be listed or admitted to trading
as provided in clause (i) above, the fair market value of the Stock as
determined in good faith by the Board of Directors of the Company. Upon the
occurrence of an event or transaction described in subparagraph 7(b) hereof,
Market Price shall mean the greater of (i) the price of the Stock as determined
in the preceding sentence, or (ii) the fair market value of the consideration
received by the holders of Stock of the Company in respect of one (1) share of
Stock as a result of such event or transaction, as determined in good faith by
the Board of Directors of the Company with respect to such consideration or
portion thereof consisting of securities or property other than cash.
4. Restrictions on Right to Exercise Stock Options.
(a) In no event shall the Company be required to transfer fractional
shares to the Optionee.
(b) In the event that the Optionee's status as an employee of the
Company shall be (i) voluntarily terminated by the Optionee or (ii) terminated
by the Company for Cause as defined in that certain Employment Agreement
between the Company and Optionee dated effective as of March 1, 1998, all
Options granted hereunder shall terminate ninety (90) days from the date on
which the Optionee ceases to be an employee of the Company.
(c) No Option shall be exercisable unless the shares issuable on the
exercise thereof shall have been registered under the Securities Act of 1933
and applicable state securities laws, or the Company shall have first received
the opinion of its counsel that registration under such laws is not required in
connection with such issuance. At the time of exercise, if the shares of Stock
with respect to which Options are being exercised have not been registered
under such laws, the Company may require the Optionee to give the Company
whatever written assurance counsel for the Company may require that the shares
of Stock are being acquired for investment and not with a view to the
distribution thereof, and that the shares will not be disposed of without the
written opinion of such counsel that registration under such laws is not
required. Share certificates for Stock issued to the Optionee upon exercise of
Options shall bear a legend to the foregoing effect to the extent counsel for
the Company deems it advisable.
5. Limitations Upon Transfer. The Options and all other rights granted
hereunder shall be exercised only by the Optionee, and the Options and all
rights granted hereunder shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), except by
will or by the laws of descent and distribution. The Options and all rights
granted hereby shall not be subject to execution, attachment or similar
process. Upon any attempt
2
<PAGE> 10
to transfer, assign, pledge, hypothecate or otherwise dispose of such Options
or any of such rights contrary to the provisions hereof, or upon levy of any
attachment or similar process upon such Options or such rights, such Options
and such rights shall immediately become null and void. Upon the death of the
Optionee, all unexercised Options shall be transferred to the Optionee's estate
and shall be entitled to be exercised in accordance with the terms hereof.
6. Method of Exercise. Any exercise of Options shall be by written
notice delivered by the Optionee to the Company, which written notice of
exercise shall be accompanied by the aggregate purchase price for the shares
with respect to which Options are being exercised. The purchase price of shares
of Stock of the Company acquired upon the exercise of Options shall be paid by
the Optionee in cash. The Company shall issue the shares of Stock covered by
any such notice to the Optionee as soon as practicable after receiving such
notice and the payment for the shares of Stock to be issued. All federal and
state stock transfer taxes, if any, on the issuance and sale of such shares of
Stock by the Company to the Optionee shall be borne and paid by the Optionee.
The Optionee shall not be, nor have any rights or privileges of, a shareholder
of the Company in respect of any of the shares issuable upon the exercise of
Options until certificates representing such shares of Stock shall have been
issued and delivered to the Optionee.
7. Adjustments.
(a) Subject to any required action by the Company's Board of
Directors or shareholders, the number of shares of Stock provided for in this
Agreement and the price per share thereof shall be proportionately adjusted for
any increase or decrease in the number of issued shares of the Stock resulting
from a subdivision or consolidation of shares or the payment of a stock
dividend (but only on the Stock) or any other increase or decrease in the
number of such shares effected without receipt of consideration by the Company.
(b) In the event of (i) a dissolution or liquidation of the Company,
(ii) a consolidation or merger in which the shareholders of the Company
immediately prior to the merger or consolidation do not, immediately following
any such consolidation or merger, own sufficient shares of the voting stock of
the surviving corporation to elect a majority of the board of directors of the
surviving corporation, (iii) a sale of all or substantially all of the assets
of the Company, or (iv) a sale of at least a majority of the outstanding Stock
of the Company to one purchaser, then this Agreement shall terminate; provided,
however, that in any such event, the Optionee shall have the right immediately
prior to any such event to exercise all Options which shall have become vested
pursuant to Paragraph 2 hereof.
(c) Except as expressly provided in this Agreement, the Optionee
shall have no rights by reason of any subdivision or consolidation of shares of
stock of any class, payment of any shares of any class, or by reason of any
dissolution or liquidation, merger or consolidation, sale of all or
substantially all of the assets of the Company, sale of a majority of the
outstanding common stock of the Company, or the spinoff of assets or stock of
another corporation.
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<PAGE> 11
(d) Any issue by the Company of shares of capital stock of any
class, or securities convertible into shares of capital stock of any class,
shall into affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of the Company's Stock subject to
this Agreement. The grant of Options pursuant to this Agreement shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve, liquidate, or sell or transfer
all or any part of its business or assets.
8. Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the Company and the Optionee and their respective heirs, legal
representatives, successors and assigns. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, this Agreement has been executed and entered into
effective as of the date first above set forth.
ACR GROUP, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
OPTIONEE:
----------------------------------
Anthony R. Maresca
4
<PAGE> 1
EXHIBIT 10.4
ACR GROUP, INC.
STOCK OPTION AGREEMENT
100,000 SHARES
This Stock Option Agreement (this "Agreement") is entered into by and
between ACR Group, Inc., a Texas corporation (the "Company"), and Anthony R.
Maresca ("Optionee") effective as of March 1, 1998, upon the following terms and
conditions:
1. Grant of Stock Option. The Company hereby grants to the Optionee
options (the "Options") to purchase from the Company 100,000 shares of the
Company's authorized and unissued common stock, par value $.01 per share
("Stock") at an exercise price of $2.24 per share (the "Exercise Price").
2. Term. The Options granted herein may be exercised in whole or in
part during the period or in part during the period beginning March 1, 2006.
Notwithstanding the foregoing, all or a portion of the Options may become
exercisable at an earlier date, as follows:
(a) Options covering 25,000 shares of Stock shall become first
exercisable upon and after the date which the Market Price (as
hereinafter defined) of the Stock has been equal to or greater than
$3.24 for ten (10) consecutive trading days;
(b) Options covering an additional 25,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $4.24 for ten (10)
consecutive trading days;
(c) Options covering an additional 25,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $5.24 for ten (10)
consecutive trading days; and
(d) Options covering the final 25,000 shares of Stock shall first
become exercisable upon and after the date which the Market Price of
the Stock has been equal to or greater than $6.24 for ten (10)
consecutive trading days.
Upon the vesting of all or any portion of the Options on March 1, 2006,
or earlier, as hereinabove provided, the Options so vested may be exercised in
whole or in part and from time to time during the four (4) year period
commencing on the date of vesting of such Options.
The term "Market Price" as used herein shall mean the price of the
Stock determined as follows: (i) the last reported sale price for the Stock on
such day on the principal securities exchange on which the 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
for the Stock on the National Association of Securities Dealers SmallCap Market
on such date, or, if there shall have
<PAGE> 2
been no trading on such date or if the 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; or (ii) if the Stock shall not be listed or admitted to
trading as provided in clause (i) above, the fair market value of the Stock as
determined in good faith by the Board of Directors of the Company. Upon the
occurrence of an event or transaction described in subparagraph 7(b) hereof,
Market Price shall mean the greater of (i) the price of the Stock as determined
in the preceding sentence, or (ii) the fair market value of the consideration
received by the holders of Stock of the Company in respect of one (1) share of
Stock as a result of such event or transaction, as determined in good faith by
the Board of Directors of the Company with respect to such consideration or
portion thereof consisting of securities or property other than cash.
4. Restrictions on Right to Exercise Stock Options.
(a) In no event shall the Company be required to transfer
fractional shares to the Optionee.
(b) In the event that the Optionee's status as an employee of
the Company shall be (i) voluntarily terminated by the Optionee or (ii)
terminated by the Company for Cause as defined in that certain Employment
Agreement between the Company and Optionee dated effective as of March 1, 1998,
all Options granted hereunder shall terminate ninety (90) days from the date on
which the Optionee ceases to be an employee of the Company.
(c) No Option shall be exercisable unless the shares issuable
on the exercise thereof shall have been registered under the Securities Act of
1933 and applicable state securities laws, or the Company shall have first
received the opinion of its counsel that registration under such laws is not
required in connection with such issuance. At the time of exercise, if the
shares of Stock with respect to which Options are being exercised have not been
registered under such laws, the Company may require the Optionee to give the
Company whatever written assurance counsel for the Company may require that the
shares of Stock are being acquired for investment and not with a view to the
distribution thereof, and that the shares will not be disposed of without the
written opinion of such counsel that registration under such laws is not
required. Share certificates for Stock issued to the Optionee upon exercise of
Options shall bear a legend to the foregoing effect to the extent counsel for
the Company deems it advisable.
5. Limitations Upon Transfer. The Options and all other rights
granted hereunder shall be exercised only by the Optionee, and the Options and
all rights granted hereunder shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), except by
will or by the laws of descent and distribution. The Options and all rights
granted hereby shall not be subject to execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of such Options or any of such rights contrary to the provisions hereof, or upon
levy of any attachment or similar process upon such Options or such rights, such
Options and such rights shall immediately become null and void.
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<PAGE> 3
Upon the death of the Optionee, all unexercised Options shall be transferred to
the Optionee's estate and shall be entitled to be exercised in accordance with
the terms hereof.
6. Method of Exercise. Any exercise of Options shall be by
written notice delivered by the Optionee to the Company, which written notice of
exercise shall be accompanied by the aggregate purchase price for the shares
with respect to which Options are being exercised. The purchase price of shares
of Stock of the Company acquired upon the exercise of Options shall be paid by
the Optionee in cash. The Company shall issue the shares of Stock covered by any
such notice to the Optionee as soon as practicable after receiving such notice
and the payment for the shares of Stock to be issued. All federal and state
stock transfer taxes, if any, on the issuance and sale of such shares of Stock
by the Company to the Optionee shall be borne and paid by the Optionee. The
Optionee shall not be, nor have any rights or privileges of, a shareholder of
the Company in respect of any of the shares issuable upon the exercise of
Options until certificates representing such shares of Stock shall have been
issued and delivered to the Optionee.
7. Adjustments.
(a) Subject to any required action by the Company's Board of
Directors or shareholders, the number of shares of Stock provided for in this
Agreement and the price per share thereof shall be proportionately adjusted for
any increase or decrease in the number of issued shares of the Stock resulting
from a subdivision or consolidation of shares or the payment of a stock dividend
(but only on the Stock) or any other increase or decrease in the number of such
shares effected without receipt of consideration by the Company.
(b) In the event of (i) a dissolution or liquidation of the
Company, (ii) a consolidation or merger in which the shareholders of the Company
immediately prior to the merger or consolidation do not, immediately following
any such consolidation or merger, own sufficient shares of the voting stock of
the surviving corporation to elect a majority of the board of directors of the
surviving corporation, (iii) a sale of all or substantially all of the assets of
the Company, or (iv) a sale of at least a majority of the outstanding Stock of
the Company to one purchaser, then this Agreement shall terminate; provided,
however, that in any such event, the Optionee shall have the right immediately
prior to any such event to exercise all Options which shall have become vested
pursuant to Paragraph 2 hereof.
(c) Except as expressly provided in this Agreement, the
Optionee shall have no rights by reason of any subdivision or consolidation of
shares of stock of any class, payment of any shares of any class, or by reason
of any dissolution or liquidation, merger or consolidation, sale of all or
substantially all of the assets of the Company, sale of a majority of the
outstanding common stock of the Company, or the spinoff of assets or stock of
another corporation.
(d) Any issue by the Company of shares of capital stock of any
class, or securities convertible into shares of capital stock of any class,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares of the Company's
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<PAGE> 4
Stock subject to this Agreement. The grant of Options pursuant to this Agreement
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, or sell or
transfer all or any part of its business or assets.
8. Miscellaneous. This Agreement shall inure to the benefit of
and be binding upon the Company and the Optionee and their respective heirs,
legal representatives, successors and assigns. This Agreement shall be governed
by and construed in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, this Agreement has been executed and entered into
effective as of the date first above set forth.
ACR GROUP, INC.
By: /s/ Alex Trevino, Jr.
------------------------------
Name: Alex Trevino, Jr.
Title: President
OPTIONEE:
/s/ Anthony R. Maresca
----------------------------------
Anthony R. Maresca
4
<PAGE> 1
EXHIBIT 10.5
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made effective
as of March 1, 1998, by and between ACR Group, Inc., a Texas corporation, and
Alex Trevino, Jr.
("Trevino") and Anthony R. Maresca ("Maresca").
WHEREAS, contemporaneously herewith the Company has granted to Trevino
and Maresca options (the "Options") to purchase 300,000 shares and 100,000
shares, respectively, of the common stock of the Company, par value $0.01 per
share (the "Common Stock");
WHEREAS, the Company wishes to grant the Purchaser certain registration
rights in respect of the shares of Common Stock issuable to the Purchaser upon
the exercise, in whole or in part, of the Options (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 United States Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Company" shall mean ACR Group, Inc., a Texas corporation, and any
successor entity thereof.
"Holder" shall mean, collectively, the Purchaser and any successor
person or entity having a right to exercise the Options and acquire Shares.
"Purchaser" shall mean, collectively, Trevino and Maresca.
"Registrable Securities" shall mean (i) the Shares; and (ii) any form
of security (as that term is defined in the Securities Act) issued to Holder in
exchange for the Shares.
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
Agreement, including, without limitation, all registration, qualification and
filing fees, exchange listing fees, printing expenses,
<PAGE> 2
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, the expenses 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).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor 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 Registrable Securities
and, except as set forth above, all fees and disbursements of counsel for such
Holder.
"Underwritten Public Offering" shall mean a public offering in which
securities of the Company or any successor thereto are 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 PIGGYBACK REGISTRATION.
2.1.1 Subject to the terms of this Agreement, if at any time
or from time to time 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 shall promptly give to Holder 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 Holder may request in a writing delivered to the
Company within 20 days after Holders' receipt of the Company's written notice.
2.1.2 Holder may participate in any number of registrations
until all of the Registrable Securities held by Holder have been distributed
pursuant to a registration or until the Registrable Securities are transferable
pursuant to Rule 144 under the Securities Act.
2.1.3 If any registration is an Underwritten Public Offering,
the right of Holder to registration pursuant to this Article II shall be
conditioned upon 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. Holder and all other holders of securities of the Company
having similar registration
2
<PAGE> 3
rights to those of Holder (the "Other Holders") 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 Article II, if the managing underwriter concludes in its
reasonable judgment that the number of securities to be registered for selling
security holders (including Holder) would materially adversely affect such
offering, the number of Registrable Securities to be registered, together with
the number of securities of the Company or other securities held by Other
Holders proposed to be registered in such offering, shall be reduced on a pro
rata basis based on the number of Registrable Securities proposed to be sold by
Holder as compared to the number of securities proposed to be sold by the Other
Holders. If Holder 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.
2.1.4 The Company shall have the right to terminate or
withdraw any registration initiated by it under this Article II prior to the
effectiveness of such registration whether or not Holder has elected to include
Registrable Securities in such registration.
2.2 EXPENSES OF REGISTRATION. All Registration Expenses shall be
borne by the Company. Unless otherwise stated herein, all Selling Expenses
relating to Registrable Securities shall be borne by Holder.
2.3 REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep Holder 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:
2.3.1 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;
2.3.2 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 securities
of the Company by such underwriter, and promptly furnish to each underwriter and
Holder 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
3
<PAGE> 4
2.3.3 Cause the securities of the Company to be listed on the
Nasdaq small-cap market or a securities exchange on which the securities are
approved for listing.
2.4 INDEMNIFICATION.
2.4.1 To the extent permitted by law, the Company will
indemnify Holder, each of its officers and directors, and each person
controlling 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) by the Company 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) by
the Company 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 Holder, each of its
officers and directors, and each person controlling Holder, 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 or delayed); provided, however, that the Company
will not be liable in any 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 Holder, 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.
2.4.2 To the extent permitted by law, if Registrable
Securities are included in the securities as to which such registration,
qualification or compliance is being effected pursuant to
4
<PAGE> 5
the terms hereof, Holder shall indemnify the Company, each of its directors,
officers and shareholders, 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) by Holder to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by Holder of any rule or regulation promulgated under the Securities
Act applicable to Holder and relating to action or inaction required of Holder
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 Holder 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 Holder (which consent shall not be unreasonably
withheld). Notwithstanding the foregoing, the liability of Holder under this
subsection 2.4.2 shall be limited in an amount equal to the net proceeds from
the sale of the securities sold by Holder, unless such liability arises out of
or is based on willful conduct by Holder. 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 asserting the loss, liability, claim or damage at or
prior to the time such furnishing is required by the Securities Act.
2.4.3 Notwithstanding the foregoing paragraphs of Section 2.4,
each party entitled to indemnification under this Section 2.4 (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 or
delayed), and the Indemnified Party may participate in such defense
5
<PAGE> 6
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.
2.4.4 If the indemnification provided for in this Section 2.4
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 holders of securities
of the Company 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 2.4 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 2.4. 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 2.4 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 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
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<PAGE> 7
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.
2.5 CERTAIN INFORMATION.
2.5.1 Holder agrees, with respect to any Registrable
Securities included in any registration, to furnish to the Company such
information regarding Holder and the distribution proposed by 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.
2.5.2 The failure of Holder to furnish the information
requested pursuant to Section 2.5.1 shall not affect the obligations 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.
2.6 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:
2.6.1 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");
2.6.2 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
2.6.3 So long as Holder 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 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 Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing Holder to sell any such securities without
registration.
2.7 GOVERNING LAW. This Agreement shall be governed in all
respects by the laws of the State of Texas.
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<PAGE> 8
2.8 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 Holder.
2.9 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. Each such notice or other
communication shall for all purposes of this Agreement be treated as effective
upon receipt.
2.10 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay
or omission to exercise any right, power or remedy accruing to any party of 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.
2.11 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.
2.12 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.
2.13 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.
8
<PAGE> 9
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.
-----------------------------
Name: Alex Trevino, Jr.
Title: President
9
<PAGE> 10
THE PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, Trevino and Maresca have executed this Agreement
effective upon the date first set forth above.
/s/ Alex Trevino, Jr.
--------------------------------
Alex Trevino, Jr.
/s/ Anthony R. Maresca
--------------------------------
Anthony R. Maresca
10
<PAGE> 1
EXHIBIT 10.7
FIRST AMENDMENT TO NOTE AGREEMENT
THIS FIRST AMENDMENT TO NOTE AGREEMENT (this "Amendment") is entered
into by and among ACR Group, Inc., a Texas corporation (the "Parent"), ACR
Supply, Inc., a Texas corporation ("ACR Supply"), Total Supply, Inc. f/k/a
Fabricated Systems, Inc., a Texas corporation ("Total Supply"), Heating and
Cooling Supply, Inc., a Nevada corporation ("Heating"), West Coast HVAC Supply,
Inc., a Texas corporation ("West Coast"), and The Catalyst Fund, Ltd., a Texas
limited partnership (with its respective successors and assigns as holders of
the Note (as hereinafter defined) herein called the "Lender"), amending that
certain Note Agreement dated effective May 26, 1993 by and among Parent, ACR
Supply, Heating, Total Supply and Lender (the "Agreement"). Except as otherwise
specifically indicated, the term "Agreement" shall include not only the
Agreement but also the Amendment. All capitalized terms contained herein shall
have the same meanings as ascribed to them in the Agreement, except as otherwise
defined herein.
ACR Supply, Total Supply, Heating, and West Coast are sometimes
collectively referred to herein as the "Borrowing Subsidiaries."
W I T N E S S E T H
WHEREAS, West Coast desires to expand its operations and requires
additional capital to undertake such expansion; and
WHEREAS, West Coast intends to purchase all of the operating assets of
A.C.H. Supply, Inc., a California corporation ("ACH") (such acquisition being
referred to as the "ACH Acquisition"), and desires to borrow the amount of
$450,000 from Lender to assist it in consummating the ACH Acquisition; and
WHEREAS, the Lender is willing to make a loan to West Coast to assist
it in making the ACH Acquisition; and
WHEREAS, West Coast has authorized the issue of a Promissory Note in
the original principal amount of $450,000 (the "West Coast Note"; the West Coast
Note and the Notes shall be referred to herein collectively as the "Notes" and
singularly as the "Note").
WHEREAS, the Lender desires to acquire the West Coast Note and to make
a loan to West Coast thereunder; and
- -------------------------------------
First Amendment to Note Agreement
-1-
<PAGE> 2
WHEREAS, the Parent, the Borrowing Subsidiaries and the Lender desire
to amend certain sections of the Agreement to reflect the foregoing;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Parties agree as follows:
1. Section 1.1 of the Agreement shall be supplemented and added
thereto is the following:
1.1 Terms Defined. As used in this Agreement, the following
terms have the respective meanings set forth below or set forth in the Section
or paragraph following such term:
Subject Document - any of the Agreement, the
Amendment, the Notes, the West Coast Note, the Security Agreements, the ACR
Supply Confirmation of Security Agreement, the Total Supply Confirmation of
Security Agreement, the Heating Confirmation of Security Agreement, the West
Coast Security Agreement, the Warrant, the Registration Rights Agreement, the
Stock Pledge Agreement, the Parent Guaranty, the Parent Confirmation of
Guaranty, the ACR Supply Guaranty, the ACR Supply Confirmation of Guaranty, the
Total Supply Guaranty, the Total Supply Confirmation of Guaranty, the Heating
Guaranty, the Heating Confirmation of Guaranty, the West Coast Guaranty, and
other documents, instruments, and certificates delivered or to be delivered
pursuant to the foregoing or in connection with the transactions contemplated
thereby, as amended from time to time as permitted thereby.
2. Section 2.2(a) of the Agreement is hereby amended by deleting the
first sentence thereof and substituting the following sentence:
(a) As of March 31, 1997, the authorized capital stock of the
Parent consisted solely of 25,000,000 shares of common stock,
$.01 par value, of which 10,371,555 such shares were issued
and outstanding, and 2,000,000 shares of preferred stock, of
which none of such shares were issued and outstanding.
3. Section 2.2(b) of the Agreement shall be supplemented and added
thereto is the following additional sentence at the end of Section 2.2(b):
The authorized capital stock of West Coast consists of 1,000,000 shares
of common stock, $.01 par value, of which 100,000 shares are issued and
outstanding; all of the issued and outstanding capital stock of West Coast is
owned by Parent.
- -------------------------------------
First Amendment to Note Agreement
-2-
<PAGE> 3
4. Section 2.11 of the Agreement shall be supplemented and added
thereto is the following additional sentence at the end of Section 2.11:
West Coast shall use the proceeds of the West Coast Note to assist in
funding the ACH Purchase.
5. Section 3.1 of the Agreement is hereby supplemented by adding
thereto the following:
3.1 A. Commitment; Closing Date. On the basis of the representations
and warranties set forth herein, the Lender shall purchase from West Coast, and
West Coast shall issue and sell to the Lender, the West Coast Note at a price
equal to 100% of the principal amount thereof. Delivery of the West Coast Note
will be made at the offices of Boyer, Ewing & Harris, Inc., at 9 Greenway Plaza,
Suite 3100, Houston, Texas, against payment therefor by wire or other transfer
of immediately available funds in the amount of $450,000 to an account
designated by West Coast, on execution hereof (the " New Closing Date").
6. Section 3.2 is hereby supplemented by adding thereto the following:
3.2 A. Lender's Conditions. The Lender's obligation to purchase the
West Coast Note on the New Closing Date pursuant to Section 3.1A shall be
subject to the satisfaction or waiver by it in writing of the following
conditions precedent:
(a) Representations and Warranties True - each of the
representations and warranties made by the Borrowers in this Agreement,
any other Subject Document, or any certificate delivered pursuant
hereto or thereto shall be true and complete on the Closing Date with
the same effect as though made on and as of such date.
(b) Compliance with this Agreement - each of Borrowers shall
have performed and complied with all agreements and conditions on its
part required to be performed or complied with pursuant to this
Agreement and the other Subject Documents on or before the New Closing
Date.
(c) No Material Effect - no event shall have occurred and no
condition shall exist that has resulted or, in the Lender's good-faith
judgment, will result in a Material Effect.
(d) Officers' Certificates - the Lender shall have received
Officers' Certificates from each of the Borrowers dated the New Closing
Date certifying that (i)
- -------------------------------------
First Amendment to Note Agreement
-3-
<PAGE> 4
the conditions specified in Section 3.2A(a) and A(b) have been
fulfilled, and (ii) no event has occurred and no condition exists that
has resulted or, in such Person's good-faith judgment, will result in a
Material Effect.
(e) Secretary's Certificates - the Secretary of each of the
Borrowers shall have executed and delivered to the Lender (i) certified
copies of such Borrower's Organizational Documents and of resolutions
of such Borrower's board of directors and, if required by such
Borrower's Organizational Documents or otherwise, its Securities'
holders authorizing such Borrower's execution, delivery, and
performance of this Agreement, the Amendment, the West Coast Note, and
the other Subject Documents to which it is or is to become a party,
which resolutions shall provide that they may be relied upon by the
Lender unless the Lender is notified subsequent to the Closing Date by
such Borrower to the contrary, and (ii) a certificate of incumbency
dated the New Closing Date with respect to each individual executing
this Agreement, the West Coast Note, or any other Subject Document on
such Borrower's behalf.
(f) West Coast Note - West Coast shall have executed and
delivered to the Lender the West Coast Note dated the New Closing Date
in the principal amount of $450,000.
(g) ACR Supply Security Agreement and Financing Statements -
(i) ACR Supply shall have executed and delivered to the Lender a
Confirmation of Security Agreement together with as many executed
copies as may be required by the Lender of all financing statements
required to be filed and all registrations required to be noted to
perfect the Liens created pursuant thereto, (ii) the Lender shall have
received evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) ACR Supply shall have
delivered to the Lender all parts of the Collateral required to be
delivered to the Lender in order to perfect the Liens created pursuant
to such Security Agreement.
(h) Total Supply Security Agreement and Financing Statements -
(i) Total Supply shall have executed and delivered to the Lender a
Confirmation of Security Agreement together with as many executed
copies as may be required by the Lender of all financing statements
required to be filed and all registrations required to be noted to
perfect the Liens created pursuant thereto, (ii) the Lender shall have
received evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) Total Supply shall
have delivered to the Lender all parts of the Collateral required to be
delivered to the Lender in order to perfect the Liens created pursuant
to such Security Agreement.
- -------------------------------------
First Amendment to Note Agreement
-4-
<PAGE> 5
(i) Heating Security Agreement and Financing Statements - (i)
Heating shall have executed and delivered to the Lender a Confirmation
of Security Agreement together with as many executed copies as may be
required by the Lender of all financing statements required to be filed
and all registrations required to be noted to perfect the Liens created
pursuant thereto, (ii) the Lender shall have received evidence that
such financing statements have been filed in the jurisdictions
requested by the Lender, and (iii) Heating shall have delivered to the
Lender all parts of the Collateral required to be delivered to the
Lender in order to perfect the Liens created pursuant to such Security
Agreement.
(j) West Coast Security Agreement and Financing Statements -
(i) West Coast shall have executed and delivered to the Lender a
Security Agreement together with as many executed copies as may be
required by the Lender of all financing statements required to be filed
and all registrations required to be noted to perfect the Liens created
pursuant to thereto, (ii) the Lender shall have received evidence that
such financing statements have been filed in the jurisdictions
requested by the Lender, and (iii) West Coast shall have delivered to
the Lender all parts of the Collateral required to be delivered to the
Lender in order to perfect the Liens created pursuant to such Security
Agreement.
(k) Opinion of Counsel - Robert D. Remy, counsel for the
Borrowers, shall have delivered to the Lender an opinion in form and
substance reasonably satisfactory to the Lender and the Lender's
counsel.
(l) Proceedings Satisfactory - all proceedings taken in
connection with the issuance and sale of the New Notes and all Subject
Documents shall be reasonably satisfactory to the Lender and the
Lenders' counsel, and the Lender and the Lenders' counsel shall have
received copies of such closing documents as they may reasonably
request in connection therewith, all in form and substance satisfactory
to the Lender and the Lender's counsel.
(m) Capital Contributions - All stockholders of each of the
Borrowers shall have made all capital contributions required to be made
with respect to their interests in such Borrower, pursuant to such
Borrower's Organizational Documents or otherwise.
(n) Insurance - (i) the Borrowers shall have delivered to the
Lender a certificate which summarizes all insurance maintained by the
Borrowers with respect to their respective Properties and businesses,
including, without limitation, liability, worker's compensation, health
and medical, property and casualty insurance, and (ii)
- -------------------------------------
First Amendment to Note Agreement
-5-
<PAGE> 6
the Parent shall have delivered to the Lender evidence satisfactory to
the Lender that it has secured the "key man" policies required by
Section 6.15 and caused the Lender to be named a "loss payee"
thereunder as provided in Section 6.15.
(o) Due Diligence - the Lender shall be satisfied in its sole
discretion with the results of its due diligence review of the
Properties, operations, and business (existing and prospective) of the
Borrowers.
(p) Small Business Administration Documents - the Borrowers
shall have delivered to the Lender such Small Business Administration
compliance documents as the Lender may reasonably request.
(q) Confirmation of Stock Pledge Agreement - the Parent shall
have executed and delivered to the Lender a Confirmation of Stock
Pledge Agreement and all of the shares of stock of the Borrowing
Subsidiaries to be delivered to the Lender pursuant thereto in the form
required by such Confirmation of Stock Pledge Agreement.
(r) Confirmation of Parent Guaranty - the Parent shall have
executed and delivered to the Lender a Confirmation of Guaranty
Agreement.
(s) Confirmation of ACR Supply Guaranty - ACR Supply shall
have executed and delivered to the Lender a Confirmation of Guaranty
Agreement.
(t) Confirmation of Total Supply Guaranty - Total Supply shall
have executed and delivered to Lender a Confirmation of Guaranty
Agreement.
(u) Confirmation of Heating Guaranty - Heating shall have
executed and delivered to the Lender a Confirmation of Guaranty
Agreement.
(v) West Coast Guaranty - West Coast shall have executed and
delivered to the Lender a Guaranty Agreement.
7. Section 3.5 is hereby supplemented in its entirety, and added
thereto is the following:
3.5 A. Expenses. The Borrowers promptly shall pay the
following expenses relating to this Agreement and the transactions contemplated
by the Subject Documents:
(a) all reasonable expenses relating to the
negotiation, execution and delivery of, and any amendments,
waivers, or consents with respect to, this
- -------------------------------------
First Amendment to Note Agreement
-6-
<PAGE> 7
Amendment, the West Coast Note, and the other Subject
Documents, including, without limitation, the reasonable fees
and expenses of Boyer, Ewing & Harris Incorporated, the
Lender's counsel; and
(b) all reasonable expenses relating to the
enforcement of the rights of the Lender (including all Persons
constituting the Lender if there are more than one) under this
Agreement and the Amendment, the Notes, and the other Subject
Documents.
The Lender at its option may apply a portion of the purchase price of the New
Notes to the payment of any such amounts owed and past due as of such time. Each
of the Borrowers shall indemnify and hold harmless the Lender from any and all
such reasonable expenses and any claims, damages, disputes or other losses or
costs (including, without limitation, reasonable attorneys' fees) arising from
such expenses.
8. Section 4.2 of the Agreement is hereby supplemented by adding
a new subsection (g) as follows:
"(g) West Coast. Interest on the West Coast Note at the rate of 12
1/2% per annum shall be due and payable in monthly
installments, the first installment of interest to become due
and payable beginning May 26, 1997, and continuing regularly
and monthly thereafter on the same day of every month through
and including August 26, 1999. Principal is payable in monthly
installments of $18,750 plus accrued interest, with additional
payments of principal in a like amount on the first day of
each month thereafter commencing on September 26, 1999
together through and including August 26, 2001. Interest
computed on the unpaid principal balance is payable monthly as
it accrues on the same dates as and in addition to principal.
Interest will be calculated on the unpaid principal balance to
the date of each payment. Prepayments will be credited first
to the accrued but unpaid interest, and then to installments
of unpaid principal in the inverse order of maturity.
9. Section 4.3 of the Agreement is hereby amended by deleting the first
sentence and substituting therefore the following:
As of any Business Day, but only if a Borrowing Subsidiary
shall have notified Lender specifying the date therefor no earlier than
the 30th day and no later than the 14th day before such date, such
Borrowing Subsidiary may prepay all or part of the principal amount
outstanding under its respective Note; provided, however, that any
partial prepayment shall be an aggregate amount of at least $100,000;
and provided
- -------------------------------------
First Amendment to Note Agreement
-7-
<PAGE> 8
further, that in the event of a partial prepayment after a Default or
an Event of Default has occurred and is continuing, Lender shall not be
deemed to have waived such Default or Event of Default or otherwise
limited in any manner its rights or remedies with respect thereto.
10. The Parties hereto acknowledge and agree that the financial
covenants contained in Section 6.9 of the Agreement have been changed pursuant
to that certain Memorandum from Ron Nixon of the Lender to Tony Maresca of the
Borrower dated as of October 7, 1996 which Borrower acknowledges and agrees to
be bound by such Memorandum by its execution of this Amendment (the "New
Covenants"). The Parties agree that: Section 6.9 of the Agreement is hereby
supplemented in its entirety and added is the following (i) the Times Interest
Earned number for May 31, 1999 contained in Section 6.9(a) of the New Covenants
shall also be required for February 28, 2000 and February 28, 2001; (ii) the
NIBT number for May 31, 1999 contained in Section 6.9(b) of the New Covenants
shall also be required for August 31, 1999, November 30, 1999, February 28,
2000, May 31, 2000, August 31, 2000, November 30, 2000, and February 28, 2001;
(iii) the Parent's consolidated net book value of tangible assets number for May
31, 1999 contained in Section 6.9(c) of the New Covenants shall also be required
for August 31, 1999, November 30, 1999, February 28, 2000, May 31, 2000, August
31, 2000, November 30, 2000, and February 28, 2001; and (iv) the Debt to Worth
Ratio number for May 31, 1999 contained in Section 6.9(d) of the New Covenants
shall also be required for August 31, 1999, November 30, 1999, February 28,
2000, May 31, 2000, August 31, 2000, November 30, 2000, and February 28, 2001;
and (v) the Parent's consolidated current ratio number for May 31, 1999
contained in Section 6.9(e) of the New Covenants shall also be required for
August 31, 1999, November 30, 1999, February 28, 2000, May 31, 2000, August 31,
2000, November 30, 2000, and February 28, 2001.
11. Section 6.15 of the Agreement is hereby deleted in its entirety and
substituted therefor is the following:
6.15 Insurance. The Borrowers will maintain insurance in full
force and effect with insurance companies of recognized standing on all of its
properties of an insurable nature in such manner and amounts and against such
casualties and contingencies as similar assets are customarily insured by
companies of established reputation which own similar assets. The Borrowers
shall also maintain in full force and effect with insurance companies of
recognized standing general liability, worker's compensation, health, medical,
and such other insurance as is customarily maintained by companies that own
assets similar to the Borrowers' and as may be reasonably requested by the
Lender in amounts reasonably requested by the Lender. In addition, the Parent
will secure and pay for "key man" insurance policies covering Alex Trevino, Jr.,
which policy shall (i) be in the amount of $1,000,000 and name the Parent as
beneficiary thereunder; provided, however, that the amount of such key man life
insurance
- -------------------------------------
First Amendment to Note Agreement
-8-
<PAGE> 9
can be reduced from time to time so long as the amount of such life insurance is
always equal to or greater than the aggregate outstanding principal balance of
the Notes at any given point in time, (ii) be collaterally assigned to the
Lender on terms acceptable to the Lender, (iii) provide for a minimum of 30
days' prior written notice to the Lender of any cancellation, and (iv) have a
guaranteed renewal period of at least six years from the New Closing Date. As of
the closing of the transactions contemplated by this Amendment, the Borrowers
will deliver to the Lender a written summary of all insurance held by the
Borrowers. Additionally, at any time and from time to time, the Borrowers will
furnish evidence of all insurance required by this Section 6.15 to the Lender
upon request by the Lender.
12. The Parties hereby acknowledge and agree that, in accordance with
the provisions of the Agreement, all representations, warranties or covenants
made by the Borrowing Subsidiaries in the Agreement, and all obligations of the
Borrowing Subsidiaries thereunder, shall survive the execution of this Amendment
and shall terminate upon the final payment due under the Notes. The Parent and
the Borrowing Subsidiaries hereby certify that all of the representations,
warranties and covenants are true and correct as of the New Closing Date and
that there are no and have not been any defaults thereunder.
13. All of the other terms and conditions contained in the Agreement
shall remain in full force and effect except as otherwise specifically amended
hereby.
- -------------------------------------
First Amendment to Note Agreement
-9-
<PAGE> 10
IN WITNESS WHEREOF, the Parent, the Borrowing Subsidiaries and Lender
have duly executed this First Amendment to Note Agreement effective as of the
14th day of April, 1997.
PARENT
ACR GROUP, INC.,
a Texas corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
BORROWING SUBSIDIARIES
ACR SUPPLY, INC.,
a Texas corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
TOTAL SUPPLY, INC. f/k/a
FABRICATED SYSTEMS, INC.,
a Texas corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
- -------------------------------------
First Amendment to Note Agreement
-10-
<PAGE> 11
HEATING AND COOLING SUPPLY, INC.
a Nevada corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
WEST COAST HVAC SUPPLY, INC.,
a Texas corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
LENDER
THE CATALYST FUND, LTD.,
a Texas limited partnership
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
- -------------------------------------
First Amendment to Note Agreement
-11-
<PAGE> 1
EXHIBIT 10.8
SECOND
AMENDED & RESTATED
NOTE AGREEMENT
BY AND BETWEEN
ACR GROUP, INC.
A TEXAS CORPORATION
AND
ALL SUBSIDIARIES OF
ACR GROUP, INC.
AND
THE CATALYST FUND, LTD.
A TEXAS LIMITED PARTNERSHIP
AND
SOUTHWEST/CATALYST CAPITAL, LTD.,
A TEXAS LIMITED PARTNERSHIP
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. ADDITIONAL DEFINITIONS AND INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
1.1 TERMS DEFINED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
1.2 ACCOUNTING PRINCIPLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
1.3 DIRECTLY OR INDIRECTLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
1.4 KNOWLEDGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
1.5 REFERENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
1.6 COMPLIANCE WITH USURY LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
SECTION 2. REPRESENTATIONS AND WARRANTIES OF BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
2.1 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
2.2 CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
2.3 AUTHORIZATION AND ENFORCEABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
2.4 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
2.5 BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
2.6 PENDING LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
2.7 COMPLIANCE WITH LAW AND OTHER INSTRUMENTS. . . . . . . . . . . . . . . . . . . . . . . . -10-
2.8 NO DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
2.9 GOVERNMENTAL CONSENTS; OFFERING OF NOTES. . . . . . . . . . . . . . . . . . . . . . . . . -11-
2.10 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
2.11 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
2.12 INSURANCE COVERAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
2.13 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
2.14 RESTRICTIONS ON BORROWER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
2.15 EMPLOYEE MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
2.16 REGULATORY STATUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
2.17 BROKERS AND FINDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
2.18 DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
2.19 PERMITS, LEASES AND CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
2.20 RECEIPT OF REASONABLY EQUIVALENT VALUE; NO INSOLVENCY. . . . . . . . . . . . . . . . . . -14-
2.21 WARRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
2.22 AFFILIATE TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
2.23 ENVIRONMENTAL LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
SECTION 3. LENDER LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
3.1 LENDER LOAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
3.2 LENDER'S CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
3.3 INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
3.4 EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
SECTION 4. PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
</TABLE>
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<TABLE>
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4.1 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
4.2 VOLUNTARY PREPAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
4.3 APPLICATION OF PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
4.4 INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
4.5 DIRECT PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
SECTION 5. CERTAIN PROVISIONS REGARDING THE LENDER NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
5.1 TRANSFER OF LENDER NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
5.2 REPLACEMENT OF LENDER NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
SECTION 6. BORROWER'S BUSINESS COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
6.1 PAYMENT OF LENDER NOTES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
6.2 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
6.3 BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
6.4 MAINTENANCE OF EXISTENCE AND STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
6.5 PAYMENT OF TAXES AND CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
6.6 SALE OR TRANSFER OF ASSETS OR MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
6.7 DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
6.8 LIENS AND ENCUMBRANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
6.10 DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
6.11 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
6.12 ERISA COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
6.13 TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
6.14 WARRANTS AND REGISTRATION RIGHTS AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . -27-
6.15 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
6.16 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
6.17 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
6.18 CERTAIN REGISTRATION OR APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
SECTION 7. INFORMATION AS TO BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
7.1 FINANCIAL AND BUSINESS INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
7.2 INSPECTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
7.3 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
SECTION 8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
8.1 NATURE OF EVENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
8.2 DEFAULT REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
8.3 ANNULMENT OF ACCELERATION OF LENDER NOTES. . . . . . . . . . . . . . . . . . . . . . . . -33-
SECTION 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
9.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
</TABLE>
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<TABLE>
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9.2 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
9.3 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
9.4 AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
9.5 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
9.6 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
9.7 ENTIRE AGREEMENT; SUPERSEDURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
9.8 MULTIPLE COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
9.9 ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
9.10 ATTORNEY'S FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
9.11 DRAFTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
</TABLE>
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<PAGE> 5
SECOND AMENDED AND RESTATED
NOTE AGREEMENT
THIS SECOND AMENDED AND RESTATED NOTE AGREEMENT (the "Agreement") is
made and entered into effective as of this 28th day of January, 1998 (the
"Execution Date"), by and among ACR GROUP, INC., a Texas corporation (herein
called "Borrower"), ACR SUPPLY, INC., a Texas corporation ("ACR Supply"), TOTAL
SUPPLY, INC. F/K/A FABRICATED SYSTEMS, INC., a Texas corporation ("Total
Supply"), HEATING AND COOLING SUPPLY, INC., a Nevada corporation ("Heating"),
WEST COAST HVAC SUPPLY, INC., a Texas corporation ("West Coast"), FLORIDA
COOLING SUPPLY, INC. a Texas corporation ("Florida Cooling"), LIFETIME FILTER,
INC., a Texas corporation ("Lifetime Filter"), VALLEY SUPPLY, INC., a Texas
corporation ("Valley Supply"), ENER-TECH INDUSTRIES, INC., a Tennessee
corporation ("Ener-Tech"), TIME ENERGY SYSTEMS SOUTHWEST, INC., a Texas
corporation ("Time Energy") and CONTRACTORS HEATING & SUPPLY, INC., a Texas
corporation ("Contractors;" together with ACR Supply, Total Supply, Heating,
West Coast, Florida Cooling, Lifetime Filter, Valley Supply, Time Energy and
Ener-Tech which constitute all subsidiaries of Borrower and being herein
collectively referred to as the "Borrower Subsidiaries"), THE CATALYST FUND,
LTD., a Texas limited partnership ("CF"), and SOUTHWEST/CATALYST CAPITAL,
LTD., a Texas limited partnership ("Southwest/Catalyst"; together with CF being
collectively referred to as "Lender").
W I T N E S S E T H:
WHEREAS, Borrower desires to borrow the amount of One Million Five
Hundred Forty Thousand and No/100 Dollars ($1,540,000.00) in a single draw
collectively from Lender for the purpose of providing capital in order to pay
off the St. James Loan, as hereinafter defined (the "Lender Loan"), by
executing two notes aggregating that amount to Lender (the "Lender Notes"); and
WHEREAS, Borrower is a party to that certain Note Agreement dated as
of May 26, 1993 as amended by that certain First Amendment to Note Agreement
dated as of April 14, 1997 together with CF and certain of the Borrower
Subsidiaries (the "Note Agreement"); and
WHEREAS, Southwest/Catalyst desires to join with CF in making the
Lender Loan;
WHEREAS, Borrower and Borrower Subsidiaries have agreed to grant to
Lender a lien on its assets to secure repayment of the Lender Notes which lien
shall be subordinate to existing senior liens held by NationsBank of Texas,
N.A. securing up to $18,000,000 of senior secured credit; and
WHEREAS, Lender is willing to loan the amount of $1,540,000 to
Borrower on the date hereof upon the completion of various requirements and
conditions;
<PAGE> 6
WHEREAS, Lender is further willing and Borrower desires that Lender
provide business counsel and advice to Borrower from time to time to assist
Borrower in its growth plans; provided under no circumstances shall Borrower be
required to follow the counsel and advice of Lender nor shall Lender be deemed
to have controlled the business activities of Borrower (as more fully described
in that certain Consulting Agreement of even date herewith between Borrower and
Lender);
NOW, THEREFORE, in consideration of the premises, the provisions
hereof, and the mutual benefits to be derived therefrom, Lender and Borrower
agree as follows:
SECTION 1. ADDITIONAL DEFINITIONS AND INTERPRETATION
1.1 TERMS DEFINED. As used in this Agreement, the following terms
have the respective meanings set forth below or set forth in this Section or
paragraph following such term:
1933 ACT - the Securities Act of 1933 and any successor
statute, as amended from time to time.
ACCOUNTS RECEIVABLE - all of Borrower's accounts, instruments,
receivables, accounts receivable, contract rights, chattel paper,
documents, general intangibles, book debts and all amounts due to
Borrower from a factor, arising from Borrower's sale of goods or
rendition of services in the ordinary course of Borrower's business,
whether now existing or hereinafter created, and all returned,
reclaimed, refused or repossessed goods, and all books and records
pertaining to the foregoing and the cash and non-cash proceeds
resulting therefrom and all security and guarantees therefor.
AFFILIATE - with respect to a Person, any other Person that
directly or indirectly, through one or more intermediaries, controls,
or is controlled by, or is under common control with, such Person;
provided, however, that neither Lender nor any affiliate thereof shall
be deemed to be an Affiliate of Borrower or Subsidiaries. The term
"control" as used in the foregoing sentence means the possession,
directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise.
ASSIGNMENT OF LIFE INSURANCE POLICY - The Assignment of Life
Insurance Policy delivered pursuant to Section 6.16.
AVERAGE TRADING PRICE - shall mean the average closing price
of the Borrower's common stock on the applicable securities exchange
beginning with the date of the prepayment and for each trading day
thereafter through and including the 29th calendar day thereafter.
BORROWER - ACR Group, Inc., a Texas corporation.
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<PAGE> 7
BORROWER SUBSIDIARIES - ACR Supply, Total Supply, Heating,
West Coast, Florida Cooling, Lifetime Filter, Valley Supply,
Ener-Tech, Time Energy and Contractors.
BUSINESS DAY - each Monday, Tuesday, Wednesday, Thursday, or
Friday that is not a day on which banking institutions in the State of
Texas are authorized or obligated by law to close.
CHANGE IN CONTROL - when (i) any "person" (as such term is
used in Section 13(d) of the Exchange Act) becomes a beneficial owner,
directly or indirectly, of Securities of Borrower representing more
than 50% of the combined voting power of Borrower's then outstanding
Securities; (ii) individuals who were directors of Borrower
immediately prior to a meeting of the shareholders of Borrower
involving a contest for the election of directors do not constitute a
majority of the directors following such election; (iii) the
shareholders of Borrower approve the dissolution or liquidation of
Borrower; (iv) the shareholders of Borrower approve an agreement to
merge or consolidate, or otherwise reorganize, with or into one or
more entities which are not Subsidiaries, as a result of which less
than 50% of the outstanding voting securities of the surviving or
resulting entity are, or are to be, owned by former shareholders of
Borrower (excluding from the term "former shareholders" a shareholder
who is, or as a result of the transaction in question becomes, an
Affiliate of any party to such merger, consolidation or
reorganization); or (v) the shareholders of Borrower approve the sale
of substantially all of Borrower's business and/or assets to a Person
that is not a Subsidiary.
CODE - the Internal Revenue Code of 1986 and any successor
statute, as amended from time to time.
COLLATERAL - the Property described in the Security Agreement
as securing Borrower's obligations under the Subject Documents and the
key man life insurance policy referred to in Section 6.16.
CURRENT ASSETS - the aggregate amount of all assets which
would, in accordance with GAAP, properly be defined as "current
assets".
CURRENT LIABILITIES - the aggregate amount of all liabilities
which would, in accordance with GAAP, properly be defined as "current
liabilities".
CURRENT RATIO - the ratio of Current Assets to Current
Liabilities.
CUSTOMERS - the account debtors obligated on the Accounts
Receivable.
DEBT - with respect to any Person, without duplication, all
obligations required by GAAP to be classified upon such Person's
balance sheet as liabilities.
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<PAGE> 8
DEFAULT - an event or condition the occurrence of which, with
the lapse of time or the giving of notice or both, would become an
Event of Default.
DEFAULT RATE - a rate of interest equal to 15% per annum.
DISTRIBUTION - except as otherwise contemplated by this
Agreement, any dividend or other distribution on account of shares of
Common Stock or other equity interests in Borrower; any acquisition by
Borrower of shares of Common Stock or other equity interests in
Borrower or of warrants, rights, or other options to purchase shares
of Common Stock or other equity interests in Borrower; or any loan or
advance (excluding advances to employees for expenses to be
reimbursed) to a shareholder or other direct or indirect holder of an
equity interest in Borrower.
EBITDA - when determined, the following, calculated on a
consolidated basis for Borrower in accordance with GAAP (in each case,
for the most recently completed twelve (12) month period):
(a) net income (after interest and Distributions
permitted under Section 6.10 and excluding extraordinary gains
and losses), plus
(b) interest expense (including that portion of
any lease payment under a lease or sublease that has been (or
under GAAP should be) capitalized on a balance sheet which
would be treated as interest under GAAP), plus
(c) non-cash operating charges, such as
depreciation and amortization expense, plus
(d) income taxes.
ERISA - the Employee Retirement Income Security Act of 1974,
as amended from time to time.
ERISA AFFILIATE - any Person described in section 4001(b)(1)
of ERISA with respect to Borrower or any Subsidiary, excluding,
however, Lender and Persons that would not be ERISA Affiliates of
Borrower or any Subsidiary but for the fact that Lender or any
transferee(s) thereof are owners of equity Securities in Borrower.
EVENT OF DEFAULT - as defined in Section 8.1.
EXCHANGE ACT - the Securities Exchange Act of 1934 and any
successor statutes, as amended and in effect from time to time.
FORCE MAJEURE - shall mean, cover and include the following:
acts of God, strikes, lock-outs, industrial disturbances, acts of the
public enemy, wars, blockades, insurrections,
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<PAGE> 9
riots, epidemics, landslides, lightning, earthquakes, fires, storms,
floods, wash-outs, tornadoes, hurricanes, windstorms, arrest and
restraint of rulers and people, civil disturbances, boycotts,
explosions, breakage or accident to machinery or equipment, and any
other causes similar to those above, which are not within the
reasonable control of the party claiming force majeure, and which by
the exercise of due diligence such party is unable to overcome.
FUNDED DEBT - when determined, the following, calculated for
Borrower in accordance with GAAP: (a) all obligations for borrowed
money (whether as a direct obligor on a promissory note, a
reimbursement obligor on a letter of credit, a guarantor or
otherwise), plus (but without duplication) (b) all lease or sublease
obligations that have been (or under GAAP should be) capitalized on a
balance sheet.
GAAP - generally accepted accounting principles of the
Accounting Principles Board of the American Institute of Certified
Public Accountants and the Financial Accounting Standards Board that
are applicable from time to time.
LENDER NOTES - those certain promissory notes executed by
Borrower and delivered to Lender evidencing the Lender Loan and
bearing interest at the rate of 12.5% per annum.
LIEN - any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property,
whether such interest is based on law, statute, or contract, and
including, without limitation, the security interest or lien arising
from a mortgage, encumbrance, pledge, conditional sale, or trust
receipt or a lease, consignment or bailment for security purposes (it
being understood that an operating lease does not constitute a Lien).
MATERIAL EFFECT - any material and adverse effect on or change
in the business Properties, operations or financial position of
Borrower, taken as a whole, or the ability of Borrower to perform its
obligations under this Agreement, the Notes, the Warrant or any of the
other Subject Documents.
OFFICER'S CERTIFICATE - a certificate signed by (a) the
Chairman of the Board, the President, or the Chief Executive Officer
of Borrower or Borrower Subsidiary, as applicable, and (b) the Chief
Financial Officer of Borrower, or Borrower Subsidiary, as applicable.
ORGANIZATIONAL DOCUMENTS - with respect to a corporation, its
articles or certificate of incorporation and bylaws; with respect to a
Person, any other organizational documents of such Person; and in each
case including all amendments thereto and restatements thereof.
PERSON - any individual, partnership, corporation, limited
liability company, trust, unincorporated organization, or other legal
entity, or any government or agency or political subdivision thereof.
-5-
<PAGE> 10
PROPERTIES- any asset, whether real, personal or mixed, or
tangible or intangible, or any interest therein.
SBA DOCUMENTS - SBA Form 480, SBA Form 652, SBA Form 1031, SBA
Form 722, SBA Form 793, and any other documents required by the Small
Business Administration to be executed.
SECURITY - the meaning given such term in section 2(1) of the
1933 Act.
SECURITY AGREEMENT - the Security Agreement delivered pursuant
to Section 3.2(h), as amended from time to time as permitted thereby.
SENIOR DEBT - shall mean that certain $18,000,000 line of
credit loan due and owing by the Borrower and its Subsidiaries to the
Senior Lender.
SENIOR LENDER - shall mean NationsBank of Texas, N.A., a
national banking association.
ST. JAMES - St. James Capital Partners, L.P., a Delaware
limited partnership.
ST. JAMES LOAN - shall mean that certain loan by St. James to
Borrower in the original principal amount of $1,400,000 plus accrued
interest in the approximate amount of $140,000.
SUBJECT DOCUMENTS - any of the Agreement, the Note Agreement,
the Lender Notes, the Security Agreement, the ACR Supply Confirmation
of Security Agreement, the Total Supply Confirmation of Security
Agreement, the Heating Confirmation of Security Agreement, the West
Coast Confirmation of Security Agreement, the Florida Cooling Security
Agreement, the Lifetime Filter Security Agreement, the Valley Supply
Security Agreement, the Ener-Tech Security Agreement, the Time Energy
Security Agreement, the Contractors Security Agreement, the Warrants,
the Registration Rights Agreements, the Confirmation of Stock Pledge
Agreement, the Borrower Confirmation of Guaranty, the ACR Supply
Confirmation of Guaranty, the Total Supply Confirmation of Guaranty,
the Heating Confirmation of Guaranty, the West Coast Confirmation of
Guaranty, the Florida Cooling Guaranty Agreement, the Lifetime Filter
Guaranty Agreement, the Valley Supply Guaranty Agreement, the
Ener-Tech Guaranty Agreement, the Time Energy Guaranty Agreement, the
Contractors Guaranty Agreement and other documents, instruments, and
certificates delivered or to be delivered pursuant to the foregoing or
in connection with the transactions contemplated thereby, as amended
from time to time as permitted thereby.
SUBSIDIARY OR SUBSIDIARIES - any corporation, limited
liability company, or other entity (other than a partnership or joint
venture) of which Borrower now or hereinafter
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<PAGE> 11
owns, directly or indirectly, more than 50% of the voting power or in
which Borrower has greater than a 50% economic interest or, with
respect to which, in accordance with GAAP, the financial statements of
such corporation, limited liability company or other entity are
required to be consolidated with the financial statements of Borrower,
or any partnership or joint venture with respect to which Borrower is
or has liability as a partner (other than solely as a limited partner)
and that is controlled or managed by Borrower, and with respect to
which, in accordance with GAAP, the financial statements of such
partnership or joint venture are required to be consolidated with the
financial statements of Borrower, but expressly excluding arrangements
that exist as a partnership only for tax purposes.
WARRANTS - shall mean those certain two warrants which each
provide Lender the option to purchase that certain number of shares of
common stock of Borrower representing an aggregate of 175,000 shares.
1.2 ACCOUNTING PRINCIPLES. Where the character or amount of any
asset or liability or item of income or expense is required to be determined or
any consolidation or other accounting computation is required to be made for
the purposes of this Agreement, this shall be done in accordance with GAAP at
the time of effect, to the extent applicable.
1.3 DIRECTLY OR INDIRECTLY. Where any provision in this Agreement
refers to action to be taken by any Person, or where such Person is prohibited
from taking such action, such provision shall be applicable whether such action
is taken directly or indirectly by such Person.
1.4 KNOWLEDGE. Except as specifically provided otherwise, any
statement in this Agreement or any Subject Document that is expressed in terms
of the knowledge or awareness of Borrower or any other Person, is intended to
and shall be deemed to mean the actual present knowledge of any officer of
Borrower or such other Person.
1.5 REFERENCES. All references herein to one gender shall include
the other. Unless otherwise expressly provided, all references to "Sections"
are to sections of this Agreement and all references to "Schedules" are to the
schedules attached hereto, each of which is made a part hereof for all
purposes.
1.6 COMPLIANCE WITH USURY LAW. It is expressly stipulated and
agreed to be the intention of Borrower and Lender to comply at all times with
applicable law governing the maximum rate or amount of interest payable on or
in connection with the Lender Notes. Accordingly, if any of the transactions
contemplated by or in connection with the Subject Documents or any other
document or instrument would be usurious under applicable law now or hereafter
governing the interest payable hereunder (including applicable United States
federal law or applicable state law, to the extent not preempted by United
States federal law), then in that event, notwithstanding anything to the
contrary in the Subject Documents or otherwise, it is agreed as follows: (a)
the aggregate of all consideration that constitutes interest under applicable
law that is contracted for, charged, taken, reserved, or received under the
Lender Notes or any of the other
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<PAGE> 12
Subject Documents or otherwise in connection with the Lender Notes with respect
thereto under no circumstances shall exceed the maximum amount of interest
allowed by applicable law, and any excess shall be credited on such Lender
Notes by the holder thereof (or if such shall have been paid in full, refunded
to the Borrower); and (b) in the event that maturity of the Lender Notes is
accelerated by reason of an election by the holder thereof resulting from any
default hereunder or otherwise, or in the event of any required or permitted
prepayment or conversion, then such consideration that constitutes interest may
never include more than the maximum amount allowed by applicable law, and
excess interest, if any, provided for in such Lender Notes or otherwise shall
be canceled automatically as of the date of such acceleration or prepayment
and, if theretofore prepaid, shall be credited on such Lender Notes (or if such
Lender Notes shall have been paid in full, refunded to Borrower), and the
provisions of such Lender Notes and any other Subject Documents or other
document or instrument shall immediately be deemed reformed and the amounts
thereafter collectible hereunder and thereunder reduced accordingly, without
the necessity of the execution of any new document, so as to comply with the
then applicable law. Determination of the rate of interest for purposes of
determining whether this transaction is usurious under any applicable laws, to
the full extent permitted by applicable law, shall be made by amortizing,
prorating, allocating, and spreading throughout the full stated term hereof
until payment in full, all sums at any time contracted for, charged, taken,
reserved, or received from Borrower for the use, forbearance, or detention of
money in connection herewith. To the extent that article 5069-1.04 of the
Texas Revised Civil Statutes is relevant to Lender for the purpose of
determining the maximum rate of interest permitted by applicable law, Lender
hereby elects to determine the applicable rate ceiling under such article by
the indicated (weekly) rate ceiling from time to time in effect, subject to
Lender's right subsequently to change such method in accordance with applicable
law.
1.7 NOTE AGREEMENT. This Agreement hereby constitutes a renewal,
modification, extension and amendment of the Note Agreement. All of the terms
and provisions of the Note Agreement shall remain in full force and effect and
be supplemental to this Agreement except as specifically amended by this
Agreement. In the event of any conflict between the Note Agreement and this
Agreement, this Agreement shall control.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF BORROWER AND SUBSIDIARIES
Each of the Borrower and Borrower Subsidiaries represent and warrant
to Lender that, as of the date hereof:
2.1 ORGANIZATION. Borrower is a corporation duly formed, validly
existing and in good standing under the laws of the State of Texas and has all
requisite corporate power and authority to own and operate its Properties, to
conduct its business as such business now is, or presently is proposed to be,
conducted, and to enter into this Agreement and the other Subject Documents to
which it is, or is to become, a party and the transactions contemplated thereby
and is duly qualified to do business in each other jurisdiction where the
character of its Properties or business there
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conducted makes such qualification necessary, unless the failure to so qualify
would not have a Material Effect. Each Borrower Subsidiary is a corporation
duly formed, validly existing and in good standing under the laws of their
respective states of incorporation and has all requisite corporate power and
authority to own and operate its Properties, to conduct its business as such
business now is, or presently is proposed to be, conducted, and to enter into
this Agreement and the other Subject Documents to which it is, or is to become,
a party and the transactions contemplated thereby and is duly qualified to do
business in each other jurisdiction where the character of its Properties or
business there conducted makes such qualification necessary, unless the failure
to so qualify would not have a Material Effect.
2.2 CAPITALIZATION.
(a) All of the Borrower Subsidiaries are wholly owned by
Borrower. Other than the Warrants, the Warrant granted to CF pursuant to the
Note Agreement and as disclosed on Schedule 2.2 hereto, no warrants, options
or any other agreements are outstanding that would permit any other party other
than Lender to acquire any ownership interest in Borrower or any Subsidiary.
(b) Except with respect to the Borrower Subsidiaries, Borrower
does not own any other Subsidiaries, nor does it own an equity or ownership
interest in any corporation, partnership, limited liability company, trust,
unincorporated organization or other legal entity. Except as disclosed on
Schedule 2.2, there are no agreements or understandings that may require
Borrower to issue additional shares of common stock or other equity Securities
or to purchase any shares of common stock or other equity Security of Borrower
or any other Security convertible into any of the foregoing.
2.3 AUTHORIZATION AND ENFORCEABILITY. Each of the Borrower and
the Borrower Subsidiaries has all necessary corporate power and authority
(whether under its Organizational Documents, applicable law, or otherwise) to
execute and deliver this Agreement, the Lender Notes, and the other Subject
Documents and to perform all of its obligations hereunder and thereunder. The
execution, delivery, and performance of this Agreement, the Lender Notes, and
the other Subject Documents by Borrower and the Borrower Subsidiaries have been
duly authorized by all requisite corporate action on the part of Borrower.
This Agreement has been duly executed and delivered by Borrower and Borrower
Subsidiaries constitutes, and the Lender Notes and other Subject Documents when
executed and delivered in accordance with the terms of this Agreement will
constitute, a valid and binding obligation of Borrower and each Borrower
Subsidiary, enforceable against Borrower and the Borrower Subsidiaries in
accordance with their terms, except for the effect of bankruptcy, insolvency,
moratorium, and other similar laws affecting creditors' rights generally and of
general equitable principles (regardless of whether arising in a proceeding in
equity or law).
2.4 FINANCIAL STATEMENTS. The balance sheets, the statements of
operations and retained earnings, and the statements of cash flows for the
fiscal quarter ended dated November 30, 1997, and the fiscal year ended
February 28, 1997, fairly present in all material respects, in accordance with
GAAP applied on a consistent basis except as disclosed in the notes thereto,
the financial position and the results of operations of Borrower as at the
dates and for the periods therein set forth. Except
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as disclosed to Lender in any Schedule hereto or as otherwise disclosed in
connection with this transaction, there are no Debts, liabilities or
obligations, whether absolute, accrued, contingent or otherwise, of the
Borrower as of the Execution Date that are not fully reflected in the November
30, 1997 and the February 28, 1997 balance sheets or the notes thereto, and
that are reasonably likely, in one case or in the aggregate, to have a Material
Effect, and, since such date there has been no Material Effect. Except as
otherwise disclosed to Lender, to the best knowledge of Borrower, there has
been no occurrence or other event or condition that might reasonably be
expected to result in a Material Effect after the date hereof, excluding any
occurrence or other event or condition affecting the United States' economy or
the industry of the Borrower generally. With respect to Debt in the ordinary
course of business, Borrower is current on all such Debt except trade debt and
except as disclosed to the Lender on Schedule 2.4.
2.5 BUSINESS. Borrower and the Borrower Subsidiaries are in the
business principally of manufacturing and distributing heating, ventilation,
air conditioning and refrigeration products.
2.6 PENDING LITIGATION. Except as disclosed on Schedule 2.6,
there is no action, suit, proceeding, arbitration, or investigation pending
against Borrower or the Borrower Subsidiaries or, to the knowledge of Borrower
or the Borrower Subsidiaries, (x) threatened against Borrower or the Borrower
Subsidiaries, or (y) affecting any of Borrower's or the Borrower Subsidiaries'
Properties, or (z) against any officer, director, or shareholder of Borrower or
any of the Borrower Subsidiaries, in his capacity as such, or relating to his
activities with Borrower or the Borrower Subsidiaries, in each case, that would
reasonably be expected to result in a Material Effect. Except as disclosed in
Schedule 2.6, neither Borrower nor any of the Borrower Subsidiaries is in
default with respect to any order of any court, other governmental agency, or
arbitrator.
2.7 COMPLIANCE WITH LAW AND OTHER INSTRUMENTS. On the basis of
what Borrower actually knows or should have known after due inquiry, (i) the
business and operations of Borrower and the Borrower Subsidiaries have been and
are being conducted in accordance with all judgments, orders, and decrees and
all laws, rules, and regulations to which it or its Properties is subject,
including without limitation, all franchising laws, (ii) Borrower and each of
its Subsidiaries have obtained all licenses, permits, franchises, and other
governmental authorizations required in connection with the ownership of its
Properties or the conduct of its business except, in each case, where the
failure to so comply or obtain would not have a Material Effect, (iii) Borrower
and each of its Subsidiaries have performed in all material respects all
obligations it is required to perform to date and is not in violation of or in
default under any of its Organizational Documents or any loan agreement,
promissory note, mortgage, lease, contract, commitment, or agreement to which
it is a party or by which it or any of its Properties may be bound, and (iv) no
event or condition has occurred and is continuing that constitutes, or, with
the giving of notice or passage of time, or both, would constitute a violation
or default by it under any of the foregoing except, in each case, where failure
to so perform or not be in violation or default or where the occurrence of any
such event or condition would not have a Material Effect.
2.8 NO DEFAULTS. No condition or event has occurred and is
continuing that constitutes a Default or an Event of Default.
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2.9 GOVERNMENTAL CONSENTS; OFFERING OF NOTES. On the basis of
what Borrower and the Borrower Subsidiaries actually know or should have known
after due inquiry, the execution, delivery, and performance by Borrower and the
Borrower Subsidiaries of this Agreement, the Lender Notes, the Warrants, and
the other Subject Documents, and the use of the proceeds of the Lender Notes,
with or without the giving of notice or the passage of time or both, will not
(x) violate any provision of any law, rule, regulation, judgment, order, or
decree of any court, other governmental agency, or arbitrator to which Borrower
or the Borrower Subsidiaries or any of their Properties is subject, or any
provision of their respective Organizational Documents, or (y) result in the
breach by it or constitute a default by it under any indenture, contract, or
other agreement, document, or instrument to which Borrower or any Borrower
Subsidiary is a party or by which they or any of their Properties may be bound,
except where any such breach or default would not have a Material Effect or (z)
result in the creation or imposition of any Lien of any nature whatsoever upon
any Properties of Borrower or the Borrower Subsidiaries. No consent,
authorization, approval, permit, or order of, or declaration to or filing with,
any court, governmental agency, or arbitrator is or will be required by
Borrower or the Borrower Subsidiaries in connection with the execution,
delivery, and performance of this Agreement and the other Subject Documents by
Borrower and the Borrower Subsidiaries or the offer, issuance, sale, or
delivery of the Lender Notes. None of Borrower, its Affiliates, and any
Persons acting on behalf of any of them has, directly or indirectly, sold or
offered for sale, or solicited any offers to buy, the Lender Notes, or
otherwise approached or negotiated with any Person, so as to subject the offer
or sale of the Lender Note to the provisions of Section 5 of the 1933 Act or to
comparable registration provisions of any applicable state securities laws.
2.10 TAXES. Borrower and each of the Borrower Subsidiaries have
prepared and duly and timely filed with the appropriate governmental agencies
all federal, state, and local income, franchise, real and personal property,
excise, severance, payroll, and other tax returns and reports required to be
filed, except where failure to so file would not have a Material Effect and,
except as permitted by Section 6.5, has paid all taxes shown to be due thereon.
Neither Borrower nor any of the Borrower Subsidiaries has executed or filed
with the Internal Revenue Service any agreement extending the period for
assessment and collection of any federal tax or is not a party to any action or
proceeding by any governmental authority for assessment and collection of
taxes, and no claim for assessment and collection of taxes that has been
asserted against Borrower or the Borrower Subsidiaries remains unpaid.
Borrower at Lender's request will provide copies of its federal tax returns for
the fiscal years ended February 28, 1996 and 1997.
2.11 USE OF PROCEEDS. Simultaneous with the execution hereof,
Borrower will use the proceeds of the Lender Notes solely for the purposes of
repaying in full the St. James Loan. No such proceeds shall be used in
violation of any law, rule, regulation, judgment, order, or decree of any
court, other governmental agency, or arbitrator, and no Default or Event of
Default shall exist immediately following the use of such proceeds on account
of such use. None of the transactions contemplated by this Agreement or any
other Subject Document will violate or result in violation of Section 7 of the
Exchange Act or any regulation issued pursuant thereto, including, without
limitation, Regulations G (12 C.F.R. Section 207, as amended), T (12 C.F.R.
Section 220, as amended), and X (12 C.F.R. Section 224, as amended) of the
Board of Governors of the Federal Reserve System, or any law or regulation
concerning foreign investment, and Borrower neither owns nor intends to carry
or
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purchase with the proceeds any "margin security" within the meaning of said
Regulation G or X, including without limitation, margin securities originally
issued by it.
2.12 INSURANCE COVERAGE. Borrower and each of the Borrower
Subsidiaries maintain all the insurance required to be maintained by them to
satisfy their obligations under Section 6.16. All required premiums currently
due as to all insurance policies maintained by Borrower and the Borrower
Subsidiaries have been paid and all such policies are in full force and effect.
The insurance coverage maintained by Borrower and each of the Borrower
Subsidiaries has been obtained by Borrower and each of the Borrower
Subsidiaries in such amounts as similar assets are customarily insured by
companies of established reputation which own similar assets.
2.13 [INTENTIONALLY OMITTED].
2.14 RESTRICTIONS ON BORROWER. Neither Borrower nor any of the
Borrower Subsidiaries is: (a) a party to any contract or agreement, or subject
to any corporate or other restriction, that could reasonably be expected to
have a Material Effect, (b) a party to any material contract or agreement that
restricts the right or ability of Borrower to incur Debt, other than this
Agreement, the other Subject Documents and the Loan and Security Agreement with
the Senior Lender, and, except for the Liens granted to the Lender or the
Senior Lender, neither Borrower nor any of the Borrower Subsidiaries has agreed
or consented to cause or permit in the future (upon the happening of a
contingency or otherwise) any Lien upon any Property of Borrower or any of the
Borrower Subsidiaries, whether now owned or hereafter acquired.
2.15 EMPLOYEE MATTERS. Except with respect to the Borrower's
401(k) plan and as disclosed on Schedule 2.15:
(a) neither Borrower nor any ERISA Affiliate sponsors,
maintains, or contributes to, or has at any time in the six-year
period preceding the date hereof sponsored, maintained, or contributed
to, any "employee pension benefit plan," as such term is defined in
section 3(2) of ERISA, that is intended to be qualified under sections
401 and 501 of the Code; and without limiting the scope of the
foregoing, neither Borrower nor any ERISA Affiliate sponsors,
maintains, or contributes to, or has at any time in the six-year
period preceding the date hereof sponsored, maintained, or contributed
to, (i) any employee pension benefit plan that is subject to title IV
of ERISA or (ii) any "multiemployer plan," as such term is defined in
Section 3(37) or 4001(a)(3) of ERISA;
(b) no act or transaction has occurred that could result
in imposition on Borrower or any ERISA Affiliate (either directly or
indirectly by reason of any indemnification or hold-harmless
agreement) of a tax or penalty imposed pursuant to Section 4975 of the
Code or Section 502 of ERISA; and
(c) neither Borrower nor any ERISA Affiliate sponsors,
maintains, or contributes to any "employee welfare benefit plan," as
such term is defined in Section 3(1) of ERISA, or to any other plan
which provides benefits to former employees thereof, that may not be
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<PAGE> 17
terminated by such Borrower in its sole discretion at any time without
any material liability to it.
2.16 REGULATORY STATUS. Borrower is not a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of any of the
foregoing or a "public-utility company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, or regulated as a
utility or common carrier under any other federal, state, or local law.
Borrower is not an "investment company" or a company "controlled" by an
"investment company,"as such terms are defined in the Investment Company Act of
1940, as amended, and Borrower is not an open-end investment company, unit
investment trust or face-amount certificate company that is or is required to
be registered under section 8 of such Act.
2.17 BROKERS AND FINDERS. Except as disclosed on Schedule 2.17
hereto, no Person has any right, interest, or valid claim against Lender,
Borrower, or any Affiliate of Borrower because of any agreement, undertaking,
act or omission of Borrower or any Affiliate of Borrower or other Person acting
on behalf of Borrower or any Affiliate of Borrower for any commission, fee, or
other compensation as a result of the transactions contemplated by this
Agreement or the Subject Documents.
2.18 DISCLOSURE. The information furnished in writing by or on
behalf of Borrower or any Affiliate of Borrower to Lender pursuant to or in
connection with this Agreement or the transactions contemplated hereby, which
information addresses or otherwise relates to the subject matter hereof or of
any of the other Subject Documents, taken as a whole, does not contain any
untrue statement of a material fact necessary to make the statements contained
therein or herein not misleading in light of the circumstances under which they
are made and taking into account any update thereof; provided, however, that in
the case of projections, Borrower represents and warrants only the factual
information serving as a basis for such projections and not the assumptions and
estimates therein. There is no fact or circumstance that Borrower knows or
reasonably should have known and that is not disclosed to Lender in writing,
that would have a Material Effect.
2.19 PERMITS, LEASES AND CONTRACTS. Borrower will furnish Lender
within five (5) days of request by Lender, a list of all permits, leases and
contracts to which Borrower and each Borrower Subsidiary is a party as of the
date hereof which require payments by Borrower or any Borrower Subsidiary, in
excess of $25,000 on an annual basis other than the Subject Documents and other
than purchase and sale orders in the ordinary course of business.
2.20 RECEIPT OF REASONABLY EQUIVALENT VALUE; NO INSOLVENCY.
Borrower has received reasonably equivalent value in exchange for its
obligations under this Agreement and the other Subject Documents to which
Borrower may be a party. Borrower is not insolvent nor will Borrower become
insolvent as a result of the transactions contemplated by this Agreement and
the other Subject Documents.
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<PAGE> 18
2.21 WARRANTS. The number of shares of Borrower that may be
purchased pursuant to the Warrants aggregates One Hundred Seventy-Five Thousand
(175,000) shares of the common stock of Borrower.
2.22 AFFILIATE TRANSACTIONS. Neither Borrower nor any Borrower
Subsidiary has entered into any transaction with an Affiliate except in the
ordinary course of business on terms no less favorable to Borrower or Borrower
Subsidiary, nor more favorable to such Affiliate, than would be obtainable in a
comparable arm's length transaction with a Person who is not an Affiliate
except that inventory and fixed assets may be sold or transferred between
Affiliates.
2.23 ENVIRONMENTAL LAWS. To the best of each of the Borrower's and
each Borrower Subsidiaries' knowledge, except as disclosed on Schedule 2.23:
(a) the business and Properties of the Borrower and the
Borrower's Subsidiaries have been operated in compliance with all
applicable Environmental Laws, noncompliance with which would have a
Material Effect;
(b) none of the Borrower and the Borrower's Subsidiaries
has received any written communication, whether from a governmental
authority, citizens' group, employee, or otherwise, alleging that the
Parent or any Subsidiary is not in compliance with any Environmental
Law applicable to it and its business and Properties which allegation
is reasonably likely to be true and, if true, to have a Material
Effect; and
(c) no "Hazardous substance," as such term is define din
the federal Comprehensive Environmental Response, Compensation, and
Liability Act, no petroleum or petroleum products, and no "solid
waste," as such term is defined in the federal Resource Conservation
and Recovery Act, has been leaked, spilled, deposited, or otherwise
released in violation of any Environmental Laws by the Parent or any
Subsidiary on any Property owned or operated by the Parent or any
Subsidiary, and neither the Parent nor any Subsidiary has handled,
treated, stored, or disposed of, or arranged for the handling,
treatment, storage, or disposed of, any production in the ordinary
course of business), or solid waste in violation of any Environmental
Laws by the Borrower or any Subsidiaries on any Property not currently
owned by the Borrower or a Borrower's Subsidiaries , which violation
would have a Material Effect.
SECTION 3. LENDER LOAN
3.1 LENDER LOAN. Subject to the terms and conditions herein,
Lender agrees to make the Lender Loan to Borrower.
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<PAGE> 19
3.2 LENDER'S CONDITIONS. Lender's obligation to make the Lender
Loan pursuant to Section 3.1 shall be subject to the satisfaction or waiver by
it in writing of the following conditions precedent:
(a) REPRESENTATIONS AND WARRANTIES TRUE - each of the
representations and warranties made by Borrower and the Borrower
Subsidiaries in this Agreement, any other Subject Document, or any
certificate delivered pursuant hereto or thereto shall be true and
complete as of the Execution Date;
(b) COMPLIANCE WITH THIS AGREEMENT - Borrower and each
Borrower Subsidiary shall have performed and complied with all
agreements and conditions on its part required to be performed or
complied with pursuant to this Agreement and the other Subject
Documents on or before the Execution Date;
(c) NO MATERIAL EFFECT - no event shall have occurred and
no condition shall exist that has resulted or, in Lender's good-faith
judgment, will result in a Material Effect;
(d) OFFICERS' CERTIFICATES - Lender shall have received
Officers' Certificates from Borrower and each of the Borrower
Subsidiaries dated the Execution Date, in a form mutually acceptable
to Borrower and Lender, certifying that (i) the conditions specified
in Section 3.2(a), (b) and (c) have been fulfilled, and (ii) no event
has occurred and no condition exists that has resulted in or, in such
officers' good-faith judgment, will result in a Material Effect;
(e) SECRETARY'S CERTIFICATES - the Secretary of Borrower
and each Borrower Subsidiary shall have delivered to Lender (i)
certified copies of Borrower's and each Borrower Subsidiary's
Organizational Documents and of resolutions of Borrower's and each
Borrower Subsidiary's board of directors and, if required, by their
shareholders authorizing Borrower's and each Borrower Subsidiary's
execution, delivery, and performance of this Agreement, the Lender
Notes, and the other Subject Documents to which it is or is to become
a party, which resolutions shall provide that they may be relied upon
by Lender unless Lender is notified subsequent to the Execution Date
by Borrower to the contrary, and (ii) a certificate of incumbency
dated the Execution Date with respect to each individual executing
this Agreement, the Lender Notes, or any other Subject Document on
Borrower's or any Borrower Subsidiary's behalf;
(f) LENDER NOTES - Borrower shall have executed and
delivered to Lender the Lender Notes dated the Execution Date in the
aggregate principal amount of One Million Five Hundred Forty Thousand
and No/100 Dollars ($1,540,000.00). The Lender Notes shall bear
interest at the rate of twelve and one-half percent (12.5%) per annum;
(h) SECURITY AGREEMENT AND FINANCING STATEMENTS -
Borrower shall have executed and delivered to Lender a Security
Agreement, together with as many executed
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<PAGE> 20
copies as may be reasonably required by Lender of all financing
statements required to be filed and all registrations required to be
noted to perfect the Liens created pursuant thereto;
(i) OPINION OF COUNSEL - Robert D. Remy, counsel for
Borrower, shall have delivered to Lender an opinion in form and
substance reasonably satisfactory to Lender and Lender's counsel;
(j) PROCEEDINGS SATISFACTORY - all proceedings taken in
connection with the issuance of the Lender Notes and the execution and
delivery of all Subject Documents shall be reasonably satisfactory to
Lender and Lender's counsel, and Lender and Lender's counsel shall
have received copies of such closing documents as they may reasonably
request in connection therewith, all in form and substance
satisfactory to Lender and Lender's counsel;
(k) INSURANCE - Borrower shall have delivered to Lender
on the Execution Date or within a reasonable time thereafter (i)
evidence satisfactory to Lender that it has secured the "key man"
policy required by Section 6.16, and (ii) a collateral assignment of
such "key man" policies in favor of Lender; and
(l) DUE DILIGENCE FEE - Lender shall have received from
Borrower on or before the Execution Date a total due diligence fee of
two percent (2.0%) of the Lender Loan, such amount being equal to
Thirty Thousand Eight Hundred and No/100 Dollars ($30,800), which
shall be due and payable on the Execution Date.
(m) SBA DOCUMENTS - Borrower shall deliver to Lender on
the Execution Date all of the SBA Documents executed by Borrower as
required.
(n) DUE DILIGENCE - the Lender shall be satisfied in its
sole discretion with the results of its due diligence review of the
Properties, operations, and business (existing and prospective) of the
Borrowers.
(o) FIRST AMENDED AND RESTATED CONSULTING AGREEMENT -
Borrower shall have executed and delivered to Lender a First Amended
and Restated Consulting Agreement with Lender.
(p) ACR SUPPLY CONFIRMATION OF SECURITY AGREEMENT AND
FINANCING STATEMENTS - (i) ACR Supply shall have executed and
delivered to the Lender a Confirmation of Security Agreement together
with as many executed copies as may be required by the Lender of all
financing statements required to be filed and all registrations
required to be noted to perfect the Liens created pursuant thereto,
(ii) the Lender shall have received evidence that such financing
statements have been filed in the jurisdictions requested by the
Lender, and (iii) ACR Supply shall have delivered to the Lender all
parts of the Collateral required to be delivered to the Lender in
order to perfect the Liens created pursuant to such Security
Agreement.
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<PAGE> 21
(q) TOTAL SUPPLY CONFIRMATION OF SECURITY AGREEMENT AND
FINANCING STATEMENTS - (i) Total Supply shall have executed and
delivered to the Lender a Confirmation of Security Agreement together
with as many executed copies as may be required by the Lender of all
financing statements required to be filed and all registrations
required to be noted to perfect the Liens created pursuant thereto,
(ii) the Lender shall have received evidence that such financing
statements have been filed in the jurisdictions requested by the
Lender, and (iii) Total Supply shall have delivered to the Lender all
parts of the Collateral required to be delivered to the Lender in
order to perfect the Liens created pursuant to such Security
Agreement.
(r) HEATING CONFIRMATION OF SECURITY AGREEMENT AND
FINANCING STATEMENTS - (i) Heating shall have executed and delivered
to the Lender a Confirmation of Security Agreement together with as
many executed copies as may be required by the Lender of all financing
statements required to be filed and all registrations required to be
noted to perfect the Liens created pursuant thereto, (ii) the Lender
shall have received evidence that such financing statements have been
filed in the jurisdictions requested by the Lender, and (iii) Heating
shall have delivered to the Lender all parts of the Collateral
required to be delivered to the Lender in order to perfect the Liens
created pursuant to such Security Agreement.
(s) WEST COAST CONFIRMATION OF SECURITY AGREEMENT AND
FINANCING STATEMENTS - (i) West Coast shall have executed and
delivered to the Lender a Confirmation of Security Agreement together
with as many executed copies as may be required by the Lender of all
financing statements required to be filed and all registrations
required to be noted to perfect the Liens created pursuant to thereto,
(ii) the Lender shall have received evidence that such financing
statements have been filed in the jurisdictions requested by the
Lender, and (iii) West Coast shall have delivered to the Lender all
parts of the Collateral required to be delivered to the Lender in
order to perfect the Liens created pursuant to such Security
Agreement.
(t) FLORIDA COOLING SECURITY AGREEMENT AND FINANCING
STATEMENTS - (i) Florida Cooling shall have executed and delivered to
the Lender a Security Agreement together with as many executed copies
as may be required by the Lender of all financing statements required
to be filed and all registrations required to be noted to perfect the
Liens created pursuant to thereto, (ii) the Lender shall have received
evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) Florida Cooling shall
have delivered to the Lender all parts of the Collateral required to
be delivered to the Lender in order to perfect the Liens created
pursuant to such Security Agreement.
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<PAGE> 22
(u) LIFETIME FILTER SECURITY AGREEMENT AND FINANCING
STATEMENTS - (i) Lifetime Filter shall have executed and delivered to
the Lender a Security Agreement together with as many executed copies
as may be required by the Lender of all financing statements required
to be filed and all registrations required to be noted to perfect the
Liens created pursuant to thereto, (ii) the Lender shall have received
evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) Lifetime Filter shall
have delivered to the Lender all parts of the Collateral required to
be delivered to the Lender in order to perfect the Liens created
pursuant to such Security Agreement.
(v) VALLEY SUPPLY SECURITY AGREEMENT AND FINANCING
STATEMENTS - (i) Valley Supply shall have executed and delivered to
the Lender a Security Agreement together with as many executed copies
as may be required by the Lender of all financing statements required
to be filed and all registrations required to be noted to perfect the
Liens created pursuant to thereto, (ii) the Lender shall have received
evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) Valley Supply shall
have delivered to the Lender all parts of the Collateral required to
be delivered to the Lender in order to perfect the Liens created
pursuant to such Security Agreement.
(w) TIME ENERGY SECURITY AGREEMENT AND FINANCING
STATEMENTS - (i) Time Energy shall have executed and delivered to the
Lender a Security Agreement together with as many executed copies as
may be required by the Lender of all financing statements required to
be filed and all registrations required to be noted to perfect the
Liens created pursuant to thereto, (ii) the Lender shall have received
evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) Time Energy shall
have delivered to the Lender all parts of the Collateral required to
be delivered to the Lender in order to perfect the Liens created
pursuant to such Security Agreement.
(x) ENER-TECH SECURITY AGREEMENT AND FINANCING STATEMENTS
- (i) Ener-Tech shall have executed and delivered to the Lender a
Security Agreement together with as many executed copies as may be
required by the Lender of all financing statements required to be
filed and all registrations required to be noted to perfect the Liens
created pursuant to thereto, (ii) the Lender shall have received
evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) Ener-Tech shall have
delivered to the Lender all parts of the Collateral required to be
delivered to the Lender in order to perfect the Liens created pursuant
to such Security Agreement.
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(y) CONTRACTORS SECURITY AGREEMENT AND FINANCING
STATEMENTS - (i) Contractors shall have executed and delivered to the
Lender a Security Agreement together with as many executed copies as
may be required by the Lender of all financing statements required to
be filed and all registrations required to be noted to perfect the
Liens created pursuant to thereto, (ii) the Lender shall have received
evidence that such financing statements have been filed in the
jurisdictions requested by the Lender, and (iii) Contractors shall
have delivered to the Lender all parts of the Collateral required to
be delivered to the Lender in order to perfect the Liens created
pursuant to such Security Agreement.
(z) CONFIRMATION OF BORROWER GUARANTY - the Borrower
shall have executed and delivered to the Lender a Confirmation of
Guaranty Agreement.
(aa) CONFIRMATION OF ACR SUPPLY GUARANTY - ACR Supply
shall have executed and delivered to the Lender a Confirmation of
Guaranty Agreement.
(bb) CONFIRMATION OF TOTAL SUPPLY GUARANTY - Total Supply
shall have executed and delivered to Lender a Confirmation of Guaranty
Agreement.
(cc) CONFIRMATION OF HEATING GUARANTY - Heating shall have
executed and delivered to the Lender a Confirmation of Guaranty
Agreement.
(dd) CONFIRMATION OF WEST COAST GUARANTY - West Coast
shall have executed and delivered to the Lender a Confirmation of
Guaranty Agreement.
(ee) FLORIDA COOLING GUARANTY - Florida Cooling shall have
executed and delivered to the Lender a Guaranty Agreement.
(ff) LIFETIME FILTER GUARANTY - Lifetime Filter shall
have executed and delivered to the Lender a Guaranty Agreement.
(ff) VALLEY SUPPLY GUARANTY - Valley Supply shall have
executed and delivered to the Lender a Guaranty Agreement.
(gg) TIME ENERGY GUARANTY - Time Energy shall have
executed and delivered to the Lender a Guaranty Agreement.
(hh) ENER-TECH GUARANTY - Ener-Tech shall have executed
and delivered to the Lender a Guaranty Agreement.
(ii) CONTRACTORS GUARANTY - Contractors shall have executed
and delivered to the Lender a Guaranty Agreement.
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<PAGE> 24
(jj) CONFIRMATION OF STOCK PLEDGE AGREEMENT - the Borrower
shall have executed and delivered to the Lender a Confirmation of
Stock Pledge Agreement and all of the shares of stock of the Borrowing
Subsidiaries to be delivered to the Lender pursuant thereto in the
form required by such Confirmation of Stock Pledge Agreement.
(kk) REGISTRATION RIGHTS AGREEMENTS - the Borrower shall
have executed and delivered to the Lender a Registration Rights
Agreements for each of CF and Southwest/Catalyst.
3.3 INVESTMENT. Lender represents to Borrower that it is an
"accredited investor," as such term is defined in Rule 501 of Regulation D
under the 1933 Act and that it is acquiring the Lender Notes and the Warrants
for its own account for the purpose of investment and not with a view to resale
or distribution thereof in violation of any securities law, and Lender has no
present intention of selling or distributing the Lender Notes or the Warrants
in violation of any securities law. It is understood that, in making its
representations and warranties in Section 2.9, Borrower is relying, to the
extent applicable, upon the representations in this Section 3.3.
3.4 EXPENSES. Borrower shall pay on the Execution Date (a) all
reasonable fees and expenses by Borrower, of Boyer, Ewing & Harris
Incorporated, Lender's counsel, in connection with the negotiation,
preparation, delivery and execution of the Subject Documents and any related
amendment, waiver or consent, and (b) after an Event of Default, all reasonable
out-of-pocket costs, fees and expenses of Lender paid or incurred by Lender in
connection with the enforcement of the obligations of the Borrower arising
under the Subject Documents (including, but not limited to, reasonable
attorneys' fees, expenses and court costs).
SECTION 4. PAYMENTS
4.1 [INTENTIONALLY OMITTED].
4.2 VOLUNTARY PREPAYMENT. As of any Business Day, but only if
Borrower shall have notified Lender specifying the date therefor no later than
the second day before such date, Borrower may prepay all or part of the
principal amount outstanding under the Lender Notes; provided, however, that
(i) in the event that the Average Trading Price of Borrower's common stock is
less than $3.50 per share at the time of the prepayment, in connection with any
prepayment during the three years following the Execution Date, Borrower shall
pay Lender a prepayment fee equal to three percent (3%) of the amount prepaid
during the first year, two percent (2%) of the amount prepaid during the second
year, and one percent (1%) of the amount prepaid during the third year, (ii) in
the event that the Average Trading Price of Borrower's common stock is equal to
or greater than $3.50 but less than $4.00 per share at the time of the
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prepayment, in connection with any prepayment during the three years following
the Execution Date, Borrower shall pay Lender a prepayment fee equal to one
percent (1%) of the amount prepaid during either the first year, the second
year or the third year, and (iii) in the event that the Average Trading Price
of Borrower's common stock is equal to or greater than $4.00 per share at the
time of the prepayment, there will be no prepayment penalty; and provided,
further, that any prepayment of principal must be in the amount of at least
$50,000.00. After the third anniversary of the Execution Date, Borrower may
from time to time prepay all or part of the principal amount outstanding under
the Lender Notes, so long as such payment is at least $50,000.00, without
penalty or premium of any kind, but with accrued interest to the date of
prepayment on the amount so prepaid, provided that any prepayments of principal
shall be applied to the principal installments due on the Lender Notes in
inverse order of their maturities.
4.3 APPLICATION OF PAYMENTS. All payments received in respect of
the Lender Notes, this Agreement, or the Subject Documents shall be applied
first to the unpaid costs and expenses for which Borrower is liable to Lender
under the Subject Documents and for which Borrower has been billed by Lender,
next to interest on the Lender Notes, and next to principal on the Lender
Notes.
4.4 INTEREST. Interest on the Lender Notes shall be twelve and
one-half percent (12.5%) per annum and shall be computed on a daily basis
consisting of a 360-day year. Interest on obligations of Borrower pursuant to
this Agreement (other than obligations of Borrower pursuant to the Lender
Notes) shall bear interest if not paid when due at the Default Rate.
4.5 DIRECT PAYMENT. The Borrower shall pay all amounts payable
with respect to the Lender Notes (without any presentment of the Lender Notes
and without any notation of such payment being made thereon) and the other
Subject Documents by either (a) wire transfer of immediately available funds
for credit prior to the close of business Houston time on the date such payment
is due to CF's Account Number 900-622-2 at Southwest Bank of Texas (ABA
#113011258) and to Southwest/Catalyst's Account Number 9033947 at Southwest
Bank of Texas (ABA# 113011258), or (b) checks delivered on the date such
payment is due to the Lender's offices. Such wire transfer instructions may be
changed to that specified by notice from the Lender thereof to the Borrower on
or before the 10th day prior to the date fixed for such payment; provided,
however, that if multiple Persons shall constitute the Lender, the Borrower
shall be required to make payment only to the Lenders' Representative and the
Lenders' Representative shall be fully responsible for distributing such
payment to the appropriate Person(s) constituting the Lender. Each such payment
shall be accompanied by sufficient information to identify the source and the
application thereof. The Lender agrees that in the event it shall sell or
transfer any of the Lender Notes in accordance with the provisions of Section
5, (a) prior to delivering such Lender Note to the purchaser or transferee, it
shall make a notation thereon of all principal, if any, paid on such Lender
Note and will also note thereon the date to which interest has been paid on
such Lender Note, and (b) it promptly shall notify the Borrower of the name and
address of the transferee of such Lender Note; provided, however, that failure
to comply with the preceding
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provisions of this sentence shall not relieve the Borrower of its obligations
to make payments under such Lender Note as and when the same become due.
SECTION 5. CERTAIN PROVISIONS REGARDING THE LENDER NOTES
5.1 TRANSFER OF LENDER NOTES. Following any transfer of either of
the Lender Notes or interest therein by Lender, or any merger or other change
in Lender's name or identity, upon surrender of such Lender Notes at the
address of Borrower described in Section 9.1, Borrower, at the request of
Lender and at Lender's expense, shall execute and deliver a new note or notes
in exchange therefor in an aggregate principal amount equal to the unpaid
principal amount of the surrendered Lender Note. Each such new note shall be
payable to such Person as Lender may request and shall be a note substantially
in the form of the Lender Note, as applicable, and dated the date upon which
the Lender Note was surrendered.
5.2 REPLACEMENT OF LENDER NOTES. Upon receipt by Borrower of
evidence reasonably satisfactory to it of the ownership of either of the Lender
Notes and that such Lender Note has been lost, stolen, destroyed, or mutilated
and (i) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to Borrower, or (ii) in the case of mutilation, upon surrender
thereof, Borrower at Lender's expense, will execute and deliver in lieu thereof
a new Lender Note in the form and the denomination of, issued in the name of
Lender, and dated the date of such lost, stolen, destroyed, or mutilated Lender
Note, which former Lender Note shall be deemed canceled. Every new note issued
pursuant to this Section 5.2 in lieu of any destroyed, lost, stolen, or
mutilated Lender Note shall constitute an original contractual obligation of
Borrower, and Lender shall be entitled to all the benefits of this Agreement;
provided, however that Lender shall indemnify and hold harmless Borrower from
any liability that might arise from issuance of a replacement Lender Note.
SECTION 6. BORROWER'S BUSINESS COVENANTS
Borrower covenants that on and after the date hereof and as long
thereafter as any of the indebtedness evidenced by either of the Lender Notes
or any other Subject Document but excluding the Warrants is outstanding:
6.1 PAYMENT OF LENDER NOTES, ETC. Borrower shall punctually pay
or cause to be paid the principal and interest to become due in respect of the
Lender Notes according to the terms thereof. Borrower shall perform its
respective obligations under all other Subject Documents to which it is or
becomes a party.
6.2 USE OF PROCEEDS. Borrower shall use the proceeds of the
Lender Notes for the purposes described in Section 2.11, and shall obtain an
assignment of all liens of St. James to Lender. No proceeds from the Lender
Notes shall be used for any purpose other than those described in Section 2.11
without the prior written consent of Lender, such consent not to be
unreasonably withheld or delayed.
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6.3 BUSINESS. Without the prior written consent of Lender,
Borrower shall not engage in any business other than the activities described
in Section 2.5.
6.4 MAINTENANCE OF EXISTENCE AND STATUS. Borrower and each of the
Borrower Subsidiaries shall (a) do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate or other applicable
existence, and, except where failure to do so would not have a Material Effect,
(b) qualify or register as a foreign corporation, limited partnership or other
entity, as applicable, in each jurisdiction in which the nature of its
Properties or business makes such qualification necessary, and (c) cause the
representations and warranties in Section 2.1 to remain true and correct.
6.5 PAYMENT OF TAXES AND CLAIMS. Borrower and the Borrower
Subsidiaries shall each pay, before they become delinquent:
(a) all relevant taxes, assessments, and governmental
charges or levies imposed upon it or its Property, and
(b) all claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords, and other like Persons that, if
unpaid, might result in the creation of a Lien upon its Property;
provided, however, that any of the foregoing items need not be paid (i) while
being contested in good faith and by appropriate proceedings or while levy and
execution thereon have been stayed, and so long as adequate book reserves or
other action required by GAAP have been established with respect thereto, (ii)
payment thereof is covered in full (subject to the customary deductible) by
insurance, or (iii) so long as the failure to pay timely any such items, singly
or in the aggregate, does not have a Material Effect.
6.6 SALE OR TRANSFER OF ASSETS OR MERGER. (a) Except for sales of
goods in the ordinary course of business, without the consent of Lender,
neither Borrower nor any of the Borrower Subsidiaries shall sell, lease,
transfer, or otherwise dispose of any of its Properties without the prior
written consent of Lender other than (i) the sale, discount or transfer of
delinquent accounts receivable in the ordinary course of business for purposes
of collection, (ii) occasional sales of immaterial assets for consideration not
less than fair market value, (iii) dispositions of assets that are obsolete or
have negligible fair market value, and (iv) sales of equipment for a fair and
adequate consideration (but if replacement equipment is necessary for the
proper operation of the business of the seller, the seller must promptly
replace the sold equipment); provided however, Borrower and the Borrower
Subsidiaries may sell, lease, transfer, or otherwise dispose of any of their
Properties without the prior written consent of Lender to the extent that such
transfers or dispositions do not exceed the amount of $100,000.00 in aggregate
per annum.
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(b) Without the prior written consent of Lender, which
consent shall not be unreasonably withheld, Borrower shall not
consolidate with or merge into any other Person or permit any other
Person to consolidate with or merge into it.
6.7 DEBT. Without the prior written consent of Lender, neither
Borrower nor Lender shall have or incur any Debt other than (a) the
indebtedness described on Schedule 6.7 attached hereto, and (b) provided that
no Default or Event of Default has occurred and is continuing at the time of
incurrence thereof, new purchase money Debt or other Debt not to exceed Two
Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in any calendar year.
6.8 LIENS AND ENCUMBRANCES. Except for the Liens securing the
Senior Debt, neither Borrower nor any of the Borrower Subsidiaries shall cause,
permit, or agree or consent to cause in the future (upon the happening of a
contingency or otherwise), any of its Property, whether now owned or hereafter
acquired, to be subject to a Lien, except:
(a) Liens securing taxes, assessments, or governmental
charges or levies or the claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords, and other like Persons, provided
the payment thereof is not at the time required by Section 6.5;
(b) Liens incurred or deposits made in the ordinary
course of business (i) in connection with workers' compensation,
unemployment insurance, social security, and other like laws or (ii)
to secure the performance of letters of credit, bids, tenders,
contracts, leases, statutory obligations, surety, appeal, and
performance bonds, and other similar obligations not incurred in
connection with the borrowing of money, or the obtaining of advances,
or the payment of the deferred purchase price of Property; but only to
the extent in each such case Borrower is in substantial compliance
with the material obligations relating to the foregoing;
(c) attachments, judgments, and other similar Liens
arising in connection with court proceedings, including, without
limitation, adverse judgments on appeal provided the execution or
other enforcement of such Liens is effectively stayed within 60 days
after the entry thereof and the claims secured thereby are being
contested in good faith and by appropriate proceedings, or as long as
adequate book reserves or other action required by GAAP have been
established with respect thereto, or payment thereof is covered in
full (subject to the customary deductible) by insurance;
(d) Liens securing the Lender Notes and other obligations
under the Subject Documents;
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(e) purchase money Liens on assets other than inventory
not to exceed $100,000 in the aggregate;
(f) purchase money Liens on inventory not to exceed 25%
of the consolidated inventory (as defined by GAAP) of Borrower;
(g) other Liens that arise by operation of law;
(i) encumbrances and restrictions on the use of real
property which do not materially impair the use thereof;
(j) any interest or title of a lessor in assets being
leased to Borrower;
(k) Liens on real property and equipment of Lifetime
Filter securing indebtedness to O'Leary Family Partnership;
(l) Liens on equipment of Contractors securing
indebtedness to Gambray, Inc.;
(m) Liens on real property of ACR Supply, Inc. securing
indebtedness to NationsBank of Texas, N.A.; and
(n) Liens on assets purchased with borrowings under
$500,000 term loan from Senior Lender.
6.9 BORROWER'S FINANCIAL COVENANTS.
(a) The amount derived by dividing (i) the consolidated EBITDA of
Borrower by (ii) the consolidated interest expense of Borrower, ("Times
Interest Earned") as calculated by amounts derived from the Parent's audited
income statements for the fiscal years ending on the last day of February of
each of 1998, 1999, 2000, 2001, 2002, and 2003 shall, at a minimum, equal 2.0.
(b) Borrower's consolidated net income before income taxes
("NIBT"), as calculated four (4) times per year on a rolling quarter basis for
the current quarter and the most recent three prior quarters as determined from
amounts reflected on Borrower's unaudited consolidated income statements as of
August 31, November 30, and May 31, and on Borrower's audited consolidated
income statements as of the last day of February, of each of 1998, 1999, 2000,
2001, 2002, and 2003 (to the extent set forth below) shall, at a minimum, be at
least $1,000,000.
(c) Borrower's consolidated net book value of tangible assets, as
calculated by amounts reflected on Borrower's unaudited consolidated balance
sheets as of August 31, November 30, and May 31, and on Borrower's audited
consolidated balance sheets as of the last day of February, of each of 1998,
1999, 2000, 2001, 2002, and 2003 (to the extent set forth below) shall, at a
minimum, be $500,000.00.
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(d) Borrower's consolidated ratio of Funded Debt to the net book
value of tangible assets ("Debt to Worth Ratio") as calculated by amounts
reflected on Borrower's consolidated unaudited balance sheets as of August 31,
November 30, and May 31, and on Borrower's audited consolidated balance sheets
as of the last day of February, of each of 1998, 1999, 2000, 2001, 2002, and
2003 (to the extent set forth below) shall, at a maximum, be 2.75.
(e) Borrower's consolidated current ratio (current assets divided
by current liabilities) as calculated by amounts reflected on Borrower's
unaudited consolidated balance sheets as of August 31, November 30, and May 31,
and on Borrower's audited consolidated balance sheets as of the last day of
February, of each of 1998, 1999, 2000, 2001, 2002, and 2003 (to the extent set
forth below) shall, at a minimum, be 1.75.
6.10 DISTRIBUTIONS. Borrower may not declare, make or permit (or
incur any liability to make, declare or permit) any Distribution without the
prior written consent of Lender.
6.11 COMPLIANCE WITH LAWS. Borrower and each Borrower Subsidiary
shall conduct their business and affairs and maintain their Properties in
compliance with all applicable laws, rules, regulations, judgments, orders, and
decrees (including, without limitation, environmental laws) the failure to
comply with which would have a Material Effect.
6.12 ERISA COMPLIANCE. Except to the extent necessary to operate
the Borrower's 401(k) plan, Borrower shall not, and shall not permit any
ERISA Affiliate to:
(a) engage in any "prohibited transaction," as such term
is defined in section 406 of ERISA or section 4975 of the Code;
(b) sponsor, maintain, or contribute to any "employee
pension benefit plan," as such term is defined in section 3(2) of
ERISA, that is subject to title IV of ERISA;
(c) contribute to or assume an obligation to contribute
to any "multi-employer plan," as such term is defined in section 3(37)
or 4001(a)(4) of ERISA; or
(d) acquire an interest in a Person that causes such
Person to become an ERISA Affiliate if such Person sponsors,
maintains, or contributes to, or at any time in the six-year period
preceding such acquisition has sponsored, maintained, or contributed
to, (i) any multiemployer pension plan or (ii) any employee pension
benefit plan that is subject to title IV of ERISA.
6.13 TRANSACTIONS WITH AFFILIATES. Neither Borrower nor any
Borrower Subsidiary will enter into any transaction with an Affiliate except in
the ordinary course of business on terms no less favorable to Borrower or
Borrower Subsidiary, nor more favorable to such Affiliate, than would be
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obtainable in a comparable arm's length transaction with a Person who is not an
Affiliate except that inventory and fixed assets may be sold or transferred
between Affiliates.
6.14 WARRANTS AND REGISTRATION RIGHTS AGREEMENT. For and in
consideration of the consulting services to be provided by Lender to Borrower
from time to time, Borrower shall execute and deliver as of the Execution Date,
the Warrants and the Registrations Rights Agreements.
6.15 [INTENTIONALLY OMITTED]
6.16 INSURANCE. Borrower and the Borrower Subsidiaries will
maintain insurance in full force and effect with insurance companies of
recognized standing on all of its properties of an insurable nature in such
manner and amounts and against such casualties and contingencies as similar
assets are customarily insured by companies of established reputation which own
similar assets. Borrower and the Borrower Subsidiaries shall also maintain in
full force and effect with insurance companies of recognized standing general
liability, worker's compensation, health, medical, and such other insurance as
is customarily maintained by companies that own assets similar to that of
Borrower and the Borrower Subsidiaries and as may be reasonably requested by
the Lender in amounts reasonably requested by the Lender. In addition,
Borrower will secure and pay for "key man" insurance policies covering Alex
Trevino, Jr., which policy shall (i) be in the amount of $2,000,000 and name
Borrower as beneficiary thereunder; provided, however, that the amount of such
key man life insurance can be reduced from time to time so long as the amount
of such life insurance is always equal to or greater than the aggregate
outstanding principal balance of the Notes and the Lender Notes at any given
point in time, (ii) be collaterally assigned to the Lender on terms acceptable
to the Lender, (iii) provide for a minimum of 30 days' prior written notice to
the Lender of any cancellation, and (iv) have a guaranteed renewal period of at
least five (5) years from the Execution Date. At any time and from time to
time, Borrower will furnish evidence of all insurance required by this Section
6.16 to the Lender upon request by the Lender.
6.17 [INTENTIONALLY OMITTED]
6.18 CERTAIN REGISTRATIONS OR APPROVALS. Borrower and the Borrower
Subsidiaries shall not, and shall not permit any Person acting on behalf of it
or any Affiliate to, take any action that would subject the offer or sale of
the Lender Notes to the provisions of section 5 of the 1933 Act or to
comparable provisions of any applicable state securities laws or that is
intended to have the effect of preventing or otherwise hindering the sale of
the Lender Notes by the Lender. If the Lender Notes require declaration or
registration with or approval of any governmental official or authority (other
than registration under the 1933 Act or state securities or blue sky laws),
Borrower and the Borrower Subsidiaries at their sole expense shall take all
requisite action in connection with such declaration and shall use all
reasonable efforts to cause the Lender Notes to be duly registered or approved
as may be required.
SECTION 7. INFORMATION AS TO BORROWER
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<PAGE> 32
Borrower covenants that on and after the date hereof and as long
thereafter as any of the indebtedness evidenced by the Lender Notes or any
other Subject Document is outstanding:
7.1 FINANCIAL AND BUSINESS INFORMATION. Borrower shall deliver,
or shall cause to be delivered, to Lender, in such quantities as it reasonably
may request:
(a) QUARTERLY STATEMENTS - promptly after preparation and
in any event on or before the 45th day after each calendar quarter:
(i) consolidated and consolidating balance sheets
of Borrower as at the end of such calendar quarter, and
(ii) consolidated and consolidating statements of
operations and cash flow of Borrower for such calendar
quarter; and
(iii) the consolidated EBITDA for Borrower for the
most recently completed four fiscal quarters, and the then
existing Funded Debt and interest expense for the preceding
four quarters, expressed as a coverage ratio for purposes of
compliance with Section 6.9 hereof;
all in reasonable detail and certified as complete and correct in all
material respects, in accordance with GAAP, subject to changes
resulting from year-end adjustments, by the President or Chief
Financial Officer of Borrower; and
(b) ANNUAL STATEMENTS - promptly after preparation and in
any event on or before the 90th day thereafter:
(i) consolidated and consolidating balance sheet
of Borrower as at the end of such year, and
(ii) consolidated and consolidating statements of
consolidated operations and cash flow of Borrower for such
year, all in reasonable detail and accompanied by an opinion
on such statements of independent certified public accountants
of recognized standing selected by Borrower, which opinion
shall state that (x) except as expressly set forth in such
opinion, such consolidated financial statements of Borrower
fairly present in all material respects the consolidated
financial condition and results of operations and cash flow of
Borrower in accordance with GAAP (except for changes in
application in which such accountants concur), and (y) the
examination of such accountants in connection with such
financial statements has been made in accordance with
generally accepted auditing standards and, accordingly,
included such tests of the accounting records and such other
auditing procedures as they considered necessary in the
circumstances;
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<PAGE> 33
(c) REPORTS AND ANNOUNCEMENTS - (i) promptly upon its
becoming available, and in any event within fifteen (15) days of
filing or receipt, as applicable, copies of each regular or periodic
report and any registration statement, prospectus, or material written
communication in respect thereof filed by Borrower with, or received
by Borrower in connection therewith from, any securities exchange or
the Securities and Exchange Commission, state securities agency, or
any successor agency, or (ii) promptly after issuance, a copy of any
press release intended for distribution by multiple media sources;
(d) ERISA - promptly upon becoming aware of the
occurrence of any "reportable event," as such term is defined in
section 4043 of ERISA, or "prohibited transaction," as such term is
defined in section 406 of ERISA or section 4975 of the Code, in either
case in connection with any employee pension benefit plan or trust
created thereunder with respect to Borrower or any ERISA Affiliate, a
written notice specifying the nature thereof, what action is being
taken or is proposed to be taken with respect thereto and, when known,
any action taken by the Internal Revenue Service, the Department of
Labor, or the Pension Benefit Guaranty Corporation with respect
thereto;
(e) NOTICE OF DEFAULT OR EVENT OF DEFAULT - as soon as
practicable, but in any event on or before the fifth (5th) Business Day
after becoming aware of the existence of a Default or an Event of
Default, a written notice specifying the nature and period of
existence thereof and what action is being taken or is proposed to be
taken with respect thereto;
(f) BANKRUPTCY EVENT - immediately following, but in any
event on or before the third (3rd) Business Day, the occurrence of an
event of the type described in Section 8.1(f), (g), or (h), a written
notice specifying such event and its status; and
(g) REQUESTED INFORMATION - promptly following request, such other
data and information respecting the business affairs, assets and
liabilities of Borrower and its Subsidiaries not otherwise required to
be kept confidential in accordance with any agreement or applicable law
(but only if any disclosure of such information will not constitute a
waiver of any attorney-client privilege) as from time to time
reasonably may be requested by Lender.
Notwithstanding anything to the contrary contained in this Section 7.1, in the
event that counsel to Borrower reasonably determines that the disclosure of any
of the foregoing information might reasonably be expected to result in a
violation of applicable federal or state securities laws, then Borrower shall
be permitted to postpone furnishing such information or portion thereof until
such potential violation of applicable securities laws no longer exists.
7.2 INSPECTION. Upon reasonable notice and at reasonable
intervals and at the Lender's expense, Borrower shall allow Lender or Lender's
representative (including representatives of the United States Small Business
Administration) during business hours or at other reasonable times to inspect
any of its or Borrower Subsidiaries' Properties, to review reports, files, and
other
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<PAGE> 34
records not otherwise required to be kept confidential in accordance with any
agreement or applicable law (but only if any disclosure of such information by
Borrower will not constitute waiver of any attorney-client privilege) and to
make and take away copies, and subject to Section 7.3, to discuss, from time to
time, any of its affairs, conditions, and finances with its directors,
officers, employees with management duties and certified public accountants.
7.3 CONFIDENTIALITY. From and after the date of this Agreement,
Lender shall hold confidential all information, unless specifically identified
by Borrower as public, heretofore or hereafter obtained in connection with this
Agreement or any Subject Document, or obtained pursuant to the requirements of
this Agreement or any Subject Document (the "Information"); provided, however,
that Lender may make disclosure reasonably required (i) in connection with the
enforcement of Lender's rights under this Agreement and the Subject Documents,
or otherwise in connection with litigation involving Lender's rights under this
Agreement and the Subject Documents (and subject to customary protective
orders); provided, however, that in any such case the Information shall only be
transmitted or disclosed to attorneys and accountants and other advisors of
Lender who "need to know" the Information and who are informed of the
confidential nature of the Information and agree in writing to keep such
Information confidential as set forth in this Section 7.3, (ii) in accordance
with such Lender's customary procedures for handling confidential information
of this nature and in accordance with safe and sound financial practices, to
inform Lender's partners and their advisors from time to time of the nature of
Borrower's business, key personnel, capital structure, and pertinent financial
information about the Borrower's performance, and other relevant data typically
disclosed by Lender to such Persons; provided, that they are informed of the
confidential nature of such information, (iii) in connection with an assignment
of the Lender Notes as allowed under this Agreement; provided, however, that on
or about the date of any such disclosure to any prospective assignee notice
thereof shall be given Borrower, and also provided further that prior to any
such disclosure, each assignee or prospective assignee shall have agreed to be
bound by the provisions of this Section 7.3, and (iv) by any governmental
authority having jurisdiction over Lender or by any applicable rule of law;
provided, however, that in such event Lender shall use its reasonable efforts
to provide Borrower with five (5) Business Days prior written notice of such
disclosure so that Borrower may seek a protective order or other appropriate
remedy, and provided, further, that in the event such protective order or other
remedy is not obtained, or Lender is unable to give Borrower prior notice
Lender will furnish the Information legally required to be provided to such
governmental authority. In no event shall Lender be obligated or required to
return any materials furnished by Borrower; provided, however, each prospective
assignee shall be required to agree that if it does not become an assignee it
shall return upon Borrower's written request all materials furnished to it by
Lender in connection with this Agreement; provided, moreover, that Lender shall
give Borrower prompt written notice of each prospective assignee from whom
Lender does not promptly request such return of materials so that Borrower may
make a request if it chooses. Nothing in this Section 7.3 shall abrogate any
Person's obligations regarding non-public information under any applicable law.
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<PAGE> 35
7.4 ACCESS TO BOARDS OF DIRECTORS. Subject to the provisions of
Section 7.3, Borrower, at the request of the Lender, shall permit
representatives of the Lender to meet with any of the Borrower's or the
Borrower Subsidiaries' boards of directors or any member thereof, at such time
or place as may be reasonably requested by the Lender.
SECTION 8. EVENTS OF DEFAULT
8.1 NATURE OF EVENTS. An "Event of Default" shall exist if any of
the following occurs and is continuing:
(a) PAYMENTS - Borrower fails to make any payment to
Lender (whether principal, interest, or otherwise) on the Lender Notes when
such payment is due;
(b) PARTICULAR COVENANT DEFAULTS - except as provided in
Section 8.1(a) or Section 8.1(c), Borrower fails fully and punctually to
perform or comply with any covenant in Sections 6.2, 6.3, 6.4, 6.6, 6.7, 6.10,
6.18 and 7.1(e) and (f);
(c) OTHER COVENANT DEFAULTS - any of the Borrowers fail
punctually to perform or comply with any other provision of this Agreement or
other Subject Documents to which it is or becomes a party, and such failure
continues beyond the 30th day after such failure shall first become known to
such Borrower;
(d) REPRESENTATIONS OR WARRANTIES - any material
representation, or other statement by Borrower or any Affiliate of Borrower in
this Agreement or any other Subject Document is materially false or misleading
as of the date made;
(e) DEFAULT ON INDEBTEDNESS OR OTHER SECURITY - an event
of default has occurred and is continuing with respect to any Debt permitted to
be incurred by Borrower or a Borrower Subsidiary pursuant to Section 6.7, or
any other Debt (other than trade accounts payable arising in the ordinary
course of business) of Borrower or a Borrower Subsidiary or any portion
thereof, equal to or exceeding $50,000 singly or in the aggregate; provided,
however, that no Event of Default shall exist under this Section 8.1(e) if
Borrower or a Borrower Subsidiary is contesting in good faith the right of the
holder of such Debt or other Securities, excluding any current interest in
equity Securities of Borrower or a Borrower Subsidiary, to accelerate the
payment of the Debt or such other Security, and has established adequate
reserves therefor;
(f) INVOLUNTARY BANKRUPTCY PROCEEDING - a receiver,
liquidator, custodian, or trustee of Borrower or any Borrower Subsidiary, or of
any material Property thereof is appointed by court order and such order
remains in effect on the ninetieth (90th) day after its entry; or a petition is
filed, a case is commenced, or relief is ordered against Borrower or any
Subsidiary under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution, or liquidation law of any jurisdiction,
whether now or hereafter in effect, and is not dismissed with (90) days of such
filing, commencement, or order;
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<PAGE> 36
(g) VOLUNTARY PETITIONS - Borrower or any Borrower
Subsidiary files a petition commencing a case in voluntary bankruptcy or
seeking relief under any provision of any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution, or liquidation law
of any jurisdiction, whether now or hereafter in effect, or consents to the
filing of any petition or the commencement of any case against it under any
such law;
(h) ASSIGNMENTS FOR BENEFIT OF CREDITORS - Borrower or
any Borrower Subsidiary makes an assignment for the benefit of its creditors,
or consents to the appointment of a receiver, trustee, custodian, or liquidator
thereof, or of all or any material portion of the Property of any of them;
(i) UNDISCHARGED FINAL JUDGMENTS - any final judgment or
judgments for the payment of money or any warrant of sequestration against any
assets of Borrower or any Subsidiary having a value, in each case, aggregating
in excess of $100,000 is or are outstanding against Borrower or any Borrower
Subsidiary and such judgments remain outstanding on the ninetieth (90th) day
after entry and have not been discharged in full or stayed, or made the subject
of pending appeal;
(j) COLLATERAL - except as permitted by Section 6.8,
should Borrower or a Borrower Subsidiary cease to own good and indefeasible
title to a material portion of the Collateral for any reason or more than
$100,000 of the Collateral shall become subject to a Lien that is prior to
Liens in favor of Lender and not permitted by Section 6.8;
(k) DISSOLUTION - a dissolution of Borrower or any
Subsidiary occurs;
(l) CHANGE IN CONTROL - a Change in Control of Borrower
or any Subsidiary; or,
(m) OFFICER OR DIRECTOR LIABILITY - The indictment of any
officer or director of Borrower for a felony crime which might reasonably be
expected to have a Material Effect.
8.2 DEFAULT REMEDIES. If an Event of Default exists, Lender may
exercise any right, power, or remedy permitted by law and shall have, in
particular, without limiting the generality of the foregoing, the right to
declare the entire principal and all interest accrued on the Lender Notes to
be, and, upon Lender's sending notice to Borrower of said declaration, the
Lender Notes shall thereupon become, forthwith due and payable, without any
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived. Immediately upon receipt of any such notice, Borrower
shall pay to Lender the entire principal of and interest accrued on the Lender
Notes.
8.3 ANNULMENT OF ACCELERATION OF LENDER NOTES. If a declaration
is made pursuant to Section 8.2 by Lender, then and in every such case such
declaration and the consequences thereof may be rescinded and annulled by (and
only by) Lender by written instrument; provided, however, that no such
rescission and annulment shall extend to or affect any subsequent Default or
Event of Default or impair any right consequent thereon.
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<PAGE> 37
SECTION 9. MISCELLANEOUS
9.1 NOTICES. (a) Except as otherwise provided in the Subject
Documents and subject to Section 9.5, all communications under the Subject
Documents shall be in writing to the following addresses or by telefax to the
following addresses: (i) if to Lender, at the following addresses or such
other address as Lender shall have furnished Borrower by notice on or before
the fifth (5th) Business Day prior thereto:
The Catalyst Fund, Ltd. and
Southwest/Catalyst Capital, Ltd.
Three Riverway, Suite 770
Houston, Texas 77056
Attention: Rick Herrman / Ron Nixon/Stephen Gillioz
Facsimile No. (713) 623-0473
with a copy to:
Boyer, Ewing & Harris Incorporated
9 Greenway Plaza, Suite 3100
Houston, Texas 77046
Attention: J. Randolph Ewing
Facsimile No. (713) 871-2024
(ii) if to Borrower, at the following address or such other
address as Borrower may have furnished by notice to Lender on or before the
fifth (5th) Business Day prior thereto:
ACR Group, Inc.
3200 Wilcrest, Suite 440
Houston, Texas 77042
Attn: Mr. Alex Trevino, President
Facsimile No. (713) 780-4067
with a copy to: Robert D. Remy
Two Memorial City Plaza
820 Gessner, Suite 1360
Houston, Texas 77024
Facsimile No. (713) 465-8018
(b) Any communication so addressed and mailed by
first-class registered or certified mail, postage prepaid, shall be deemed to
be received on the third Business Day after so mailed, and if delivered by
personal delivery (including by courier) or facsimile to such address, upon
delivery during normal business hours (receipt confirmed by telephone in the
case of facsimile).
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<PAGE> 38
9.2 SURVIVAL. Each representation, warranty, or covenant made by
Borrower in this Agreement or any other Subject Documents shall survive the
Execution Date and the delivery of the documents and instruments described in
Section 3.2, regardless of any investigation made by Lender or on its behalf.
All obligations of Borrower and the Borrower Subsidiaries hereunder shall
survive the Execution Date and shall terminate upon the payment of the Lender
Notes. At the Execution Date, Lender has no actual knowledge of an Event of
Default by Borrower.
9.3 SUCCESSORS AND ASSIGNS. Borrower may not assign any of its
rights or delegate any of its duties to any Person without prior written
consent of Lender. This Agreement shall be binding upon the successors and
assigns of each of the parties and, except as expressly set forth in this
Section 9.3, shall inure to the benefit of the successors and permitted assigns
of each of the parties. The provisions of this Agreement are intended to be for
the benefit of all Persons constituting Lender, from time to time, in
accordance with the terms of this Agreement.
9.4 AMENDMENT AND WAIVER. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with and only with the
written consent of Borrower and Lender.
9.5 GOVERNING LAW. THIS AGREEMENT, THE LENDER NOTES, THE OTHER
SUBJECT DOCUMENTS, AND THE LEGAL RELATIONS AMONG THE PARTIES HERETO AND
THERETO, AND ALL RIGHTS AND OBLIGATIONS HEREUNDER AND THEREUNDER, INCLUDING
MATTERS OF CONSTRUCTION, VALIDITY, AND PERFORMANCE, SHALL BE GOVERNED BY AND
INTERPRETED, CONSTRUED, APPLIED, AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE
STATE OF TEXAS AND THE UNITED STATES WITHOUT REFERENCE TO THE LAW OF ANOTHER
JURISDICTION.
9.6 SEVERABILITY. If any provision in this Agreement or the
Lender Notes is rendered or declared illegal, invalid, or unenforceable by
reason of any rule of law, public policy, or final judicial decision, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby are not affected in any manner adverse to Borrower or
Lender. Upon such determination that any term or other provision is invalid,
illegal, or incapable of being enforced, Borrower and Lender shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties hereto as closely as possible to the end that the transactions
contemplated hereby are fulfilled to the extent possible.
9.7 ENTIRE AGREEMENT; SUPERSEDURE. This Agreement and the other
Subject Documents constitute the entire agreement of the parties and the
Affiliates with respect to the matters contained herein and therein and
supersede all prior contracts and agreements with respect thereto, whether
written or oral. THIS WRITTEN LOAN AGREEMENT AND THE OTHER SUBJECT DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
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<PAGE> 39
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
9.8 MULTIPLE COUNTERPARTS. The parties may execute more than one
counterpart of this Agreement, each of which shall be an original but all of
which together shall constitute one and the same instrument.
9.9 ARBITRATION. Any controversy or claim between or among the
parties hereto including but not limited to those arising out of or relating to
this Agreement or any Subject Documents, including any claim based on or
arising from an alleged tort, shall be determined by binding arbitration to be
held in Harris County, Texas in accordance with the Federal Arbitration Act (or
if not applicable, the applicable state law), the rules of practice and
procedure for the arbitration of commercial disputes of the American
Arbitration Association ("AAA"), and the "Special Rules" set forth below. In
the event of any inconsistency, the Special Rules shall control. Judgment upon
any arbitration award may be entered in any court having jurisdiction. Any
party to this agreement may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which this
Agreement applies in any court having jurisdiction over such action.
(a) SPECIAL RULES. Prior to the initiation of any arbitration the
Parties agree to submit all claims to mediation to be conducted by a mediator
in good standing with the AAA. Upon submission of a dispute to the AAA, the
Borrower and Lender shall each submit to the rules and regulations of the AAA
for the purposes of conducting such mediation.
(b) RESERVATION OF RIGHTS. Nothing in this Section 9.9 shall be deemed
to (i) limit the applicability of any otherwise applicable statutes of
limitation or repose and any waivers contained in this Agreement; or (ii) be a
waiver by Lender of the protection afforded to it by 12 U.S.C. Sec. 91 or any
substantially equivalent state law; or (iii) limit the right of any party (A)
to exercise self help remedies such as (but not limited to) offset, or (B) to
nonjudicially foreclose against any real or personal property collateral, or
(C) to obtain from a court provisional or ancillary remedies such as (but not
limited to) injunctive relief, writ of possession or the appointment of a
receiver, or (iii) except for limiting the right of judicial foreclosure, limit
the right of any party to enforce its rights under any Subject Document with
respect to matters as to which there is no legal dispute. Any party may
exercise such self help rights, nonjudicially foreclose upon such property, or
obtain such provisional or ancillary remedies before, during or after the
pendency of any arbitration proceeding brought pursuant to this Agreement.
Neither the exercise of self help remedies or any nonjudicial foreclosure, nor
the institution or maintenance of an action for provisional or ancillary
remedies shall constitute a waiver of the right of any party, including the
claimant in any such action, to arbitrate the merits of the controversy or
claim occasioning resort to such remedies. Any attorney-client privilege and
other protection against disclosure of confidential information, including,
without limitation, any protection afforded the work-product of any attorney,
that could otherwise be claimed by any party shall be available to and may be
claimed by any such party in any arbitration proceeding. No party waives any
attorney-client privilege or any other protection against disclosure
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<PAGE> 40
of confidential information by reason of anything contained in or done pursuant
to or in connection with this Section 9.9.
9.10 ATTORNEY'S FEES. If any litigation or arbitration proceeding
is instituted to enforce or interpret the provisions of this Agreement or the
transactions described herein, the prevailing party in such action shall be
entitled to recover its reasonable attorneys' fees from the other party hereto.
9.11 DRAFTING. Both parties hereto acknowledge that each party was
actively involved in the negotiation and drafting of this Agreement and that no
law or rule of construction shall be raised or used in which the provisions of
this Agreement shall be construed in favor or against either party hereto
because one is deemed to be the author thereof.
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<PAGE> 41
EXECUTED as of the date first above written.
BORROWER:
ACR GROUP, INC.,
a Texas corporation
By:
------------------------------
Alex Trevino, Jr., President
BORROWER SUBSIDIARIES
ACR SUPPLY, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
TOTAL SUPPLY, INC. f/k/a
FABRICATED SYSTEMS, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
HEATING AND COOLING SUPPLY, INC.
a Nevada corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
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<PAGE> 42
WEST COAST HVAC SUPPLY, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
FLORIDA COOLING SUPPLY, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
LIFETIME FILTER, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
VALLEY SUPPLY, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
TIME ENERGY SYSTEMS SOUTHWEST, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
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<PAGE> 43
ENER-TECH INDUSTRIES, INC.,
a Tennessee corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
CONTRACTORS HEATING & SUPPLY, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
LENDER:
THE CATALYST FUND, LTD.,
a Texas limited partnership
By: RDR Management I, Inc.,
its general partner
By:
--------------------------
Ron Nixon, Vice President
SOUTHWEST/CATALYST CAPITAL,
LTD., a Texas limited partnership
By: SWC Management, Inc.,
its general partner
By:
--------------------------
Ron Nixon, Vice President
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<PAGE> 44
SCHEDULES
2.2 Capitalization
2.4 Noncurrent Debt
2.6 Pending Litigation
2.15 Employee Matters
2.17 Brokers and Finders
2.23 Environmental Laws
6.7 Debt
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<PAGE> 1
EXHIBIT 10.9
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. 6 750,000 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 February
28, 2003, 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
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
1
<PAGE> 2
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 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
2
<PAGE> 3
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.
3
<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
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<PAGE> 5
the minimum purchase price provided in such
options, warrants or rights for the 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;
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<PAGE> 6
(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) all shares of Common Stock issued by the Company on
or prior to January 28,1998, (2) shares of Common Stock
to be issued from time to time pursuant to stock
options granted by the Company on or prior to January
28, 1998, (3) shares of Common Stock to be issued from
time to time pursuant to warrants issued by the Company
on or prior to January 28, 1998, (4) shares of Common
Stock which may be issued to directors, officers or
employees of the Company or its subsidiaries pursuant
to employment agreements, incentive compensation plans
or agreements, or similar agreements or arrangements,
now or hereafter in effect, approved by the Board of
Directors of the Company, (5) shares of Common Stock to
be issued from time to time pursuant to the 1996 Stock
Option Plan of the Company, as may be amended from time
to time, (6) shares of Common Stock to be issued from
time to time pursuant to any other stock option or
similar plan approved by the stockholders of the
Company, (7) up to 200,000 shares of Common Stock to be
issued from time to time
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<PAGE> 7
pursuant to warrants issued by the Company to
equity investors, consultants, advisors,
independent contractors and agents of the Company
approved by the Board of Directors of the Company.
(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 &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
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<PAGE> 8
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 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 ($.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
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<PAGE> 9
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,
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. Except with respect to a registered public
offering, 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
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<PAGE> 10
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). Except with respect to a registered public
offering, 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 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
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<PAGE> 11
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 hereunder to the Company.
(b) General Option. At any time after the period
beginning on January 28, 1998, 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
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<PAGE> 12
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 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
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<PAGE> 13
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
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, without first
receiving the express written consent of the Holder, except for the
issuance of Excluded Stock, 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).
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 January 28, 1998 executed by
the Company in the aggregate original principal amount of $1,100,000 and
payable to The Catalyst Fund, Ltd., a Texas limited partnership, and dated
January 28, 1998 executed by the Company in the aggregate original
principal amount of $440,000 and payable to Southwest/Catalyst Capital,
Ltd., a Texas limited partnership, and dated April 14, 1997 executed by
West Coast HVAC Supply, Inc., a Texas corporation, in the
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<PAGE> 14
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 February 28, 2003,
then the expiration date of this Warrant shall also be likewise extended to
the date that is the same as the latest of the last scheduled payment
dates, as so amended, under any of the Notes. Notwithstanding the preceding
sentence, in the event the entire amount of principal and interest on the
Notes is fully repaid prior to July 31, 2003, 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 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;
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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.
13. 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 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 13(b), all information obtained by it
pursuant to Section 13(a) or otherwise under this Agreement (such
information is referred to for purposes of this Section 13(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 13(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
15
<PAGE> 16
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 13(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. 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
16
<PAGE> 17
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" meaning this Warrant and all
references in such 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.
17
<PAGE> 18
THIS WARRANT IS ISSUED IN SUBSTITUTION FOR AND REPLACEMENT
OF THAT CERTAIN WARRANT NO. 4 ISSUED BY THE COMPANY TO THE HOLDER
DATED APRIL 14, 1997, SUCH WARRANT NO. 4 BEING HEREBY DEEMED
CANCELLED.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed and attested by its Secretary.
Dated: January 28, 1998 ACR GROUP, INC.
By:
-----------------------------------
Alex Trevino, Jr., President
Attest:
- ----------------------------------
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 :
-----------------------------
-----------------------------
-----------------------------
19
<PAGE> 1
EXHIBIT 10.10
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. 8 50,000 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 February 28, 2003, unless
otherwise extended as provided herein, or, if such date is not a business day,
the next succeeding business day (the "Exercise Period"), 50,000 (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 $2.0562
(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
<PAGE> 2
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 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
2
<PAGE> 3
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 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.
3
<PAGE> 4
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 $2.0562 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 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
4
<PAGE> 5
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
5
<PAGE> 6
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;
(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
6
<PAGE> 7
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 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)
all shares of Common Stock issued by the Company on or prior
to January 28,1998, (2) shares of Common Stock to be issued
from time to time pursuant to stock options granted by the
Company on or prior to January 28, 1998, (3) shares of Common
Stock to be issued from time to time pursuant to warrants
issued by
7
<PAGE> 8
the Company on or prior to January 28, 1998, (4) shares of
Common Stock which may be issued to directors, officers or
employees of the Company or its subsidiaries pursuant to
employment agreements, incentive compensation plans or
agreements, or similar agreements or arrangements, now or
hereafter in effect, approved by the Board of Directors of the
Company, (5) shares of Common Stock to be issued from time to
time pursuant to the 1996 Stock Option Plan of the Company, as
may be amended from time to time, (6) shares of Common Stock
to be issued from time to time pursuant to any other stock
option or similar plan approved by the stockholders of the
Company, (7) up to 200,000 shares of Common Stock to be issued
from time to time pursuant to warrants issued by the Company
to equity investors, consultants, advisors, independent
contractors and agents of the Company approved by the Board of
Directors of the Company.
(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 &action 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
8
<PAGE> 9
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 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
9
<PAGE> 10
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, 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
10
<PAGE> 11
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. Except with respect to a registered public
offering, 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
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<PAGE> 12
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). Except with
respect to a registered public offering, 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 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
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<PAGE> 13
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 hereunder to the
Company.
(b) General Option. At any time after the period beginning on
January 28, 1998, 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
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<PAGE> 14
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 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
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<PAGE> 15
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
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<PAGE> 16
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
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, without first receiving the
express written consent of the Holder, except for the issuance of Excluded
Stock, 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).
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 as of even date herewith executed by the
Company in the aggregate original principal amount of $440,000 and payable to
The Catalyst Fund, Ltd., a Texas limited partnership, and $1,100,000 and payable
to Southwest/Catalyst Capital, Ltd, a Texas limited partnership, and 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
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<PAGE> 17
original principal amount of $1,000,000 shall be extended beyond January 31,
2003, then the expiration date of this Warrant shall also be likewise extended
to the date that is the same as 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 interest on the Notes is fully repaid prior to
January 31, 2003, 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 January 31, 2003.
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
17
<PAGE> 18
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.
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
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<PAGE> 19
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 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
19
<PAGE> 20
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. 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).
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<PAGE> 21
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
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<PAGE> 22
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
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.
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<PAGE> 23
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and attested by its Secretary.
Dated: January 28, 1998 ACR GROUP, INC.
By:
--------------------------------
Alex Trevino, Jr.
President
Attest:
- ------------------------------------
Anthony R. Maresca, Secretary
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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):
--------------------------
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<PAGE> 1
EXHIBIT 10.11
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. 7 125,000 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, Southwest/Catalyst
Capital, 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 February 28,
2003, unless otherwise extended as provided herein, or, if such date is not a
business day, the next succeeding business day (the "Exercise Period"), 125,000
(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
$2.0562 (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
<PAGE> 2
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> 3
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,
3
<PAGE> 4
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.
4
<PAGE> 5
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 $2.0562 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
5
<PAGE> 6
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.
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
6
<PAGE> 7
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;
(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
7
<PAGE> 8
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 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)
all shares of Common Stock issued by the Company on or prior
to January 28,1998, (2) shares of Common Stock to be issued
from time to time pursuant to stock options granted by the
Company on or prior to January 28, 1998, (3) shares of Common
Stock to be issued from time to time pursuant to warrants
issued by the Company on or prior to January 28, 1998, (4)
shares of Common Stock which may be issued to directors,
officers or employees of the Company or its subsidiaries
pursuant to employment agreements, incentive
8
<PAGE> 9
compensation plans or agreements, or similar agreements or
arrangements, now or hereafter in effect, approved by the
Board of Directors of the Company, (5) shares of Common Stock
to be issued from time to time pursuant to the 1996 Stock
Option Plan of the Company, as may be amended from time to
time, (6) shares of Common Stock to be issued from time to
time pursuant to any other stock option or similar plan
approved by the stockholders of the Company, (7) up to 200,000
shares of Common Stock to be issued from time to time pursuant
to warrants issued by the Company to equity investors,
consultants, advisors, independent contractors and agents of
the Company approved by the Board of Directors of the Company.
(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 &action 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
9
<PAGE> 10
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 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 ($.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
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<PAGE> 11
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, 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
11
<PAGE> 12
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. Except with respect to a registered public
offering, 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). Except with respect to a registered
public offering, 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 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
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<PAGE> 13
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 hereunder to the Company.
(b) General Option. At any time after the period beginning on
January 28, 1998, 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)
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<PAGE> 14
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 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
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<PAGE> 15
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
reclassification or change (including a
15
<PAGE> 16
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, without first receiving the
express written consent of the Holder, except for the issuance of Excluded
Stock, 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).
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 as of even date herewith executed by the
Company in the aggregate original principal amount of $1,100,000 and payable to
Southwest/Catalyst Capital, Ltd., a Texas limited partnership, and $440,000 and
payable to the Catalyst Fund, Ltd., a Texas limited partnership and 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 January 31, 2003, then the expiration date of this
Warrant shall also be likewise extended to the date that is the same as 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 interest on the Notes is fully repaid prior to January 31, 2003,
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 January 31, 2003. 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
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<PAGE> 17
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.
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
17
<PAGE> 18
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
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 complete and file any information reporting forms presently or
hereafter required by the Commission as a
18
<PAGE> 19
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
19
<PAGE> 20
information to any Person who is an equity investor in The Catalyst Fund, Ltd.
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 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
20
<PAGE> 21
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 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.
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<PAGE> 22
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and attested by its Secretary.
Dated: January 28, 1998 ACR GROUP, INC.
By:
---------------------------
Alex Trevino, Jr.
President
Attest:
--------------------------------------
Anthony R. Maresca, Secretary
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<PAGE> 23
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):
---------------------------------
23
<PAGE> 1
EXHIBIT 10.12
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
DATED AS OF JANUARY 28, 1998
BY AND BETWEEN
THE CATALYST FUND, LTD.
AND
ACR GROUP, INC.
- --------------------------------------------------------------------------------
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Section 1. DEFINITIONS
Section 2. REGISTRATION RIGHTS
2.1 Piggyback Registration..........................................................................2
2.2 Demand Registration Rights......................................................................3
(a) Right to Demand........................................................................3
(b) Number of Demand Registrations; Payment of Expenses....................................4
(c) Selection of Underwriters..............................................................5
(d) Company Registration...................................................................5
(e) Limitations on Registration Rights.....................................................5
2.3 Holdback Agreements; Requirements of the Holder.................................................7
(a) Restrictions on Public Sale by the Holder..............................................7
(b) Restrictions on Public Sale by the Company.............................................7
(c) Cooperation by Holder..................................................................7
2.4 Registration Procedures.........................................................................7
2.5 Registration Expenses..........................................................................11
2.6 Indemnification; Contribution..................................................................12
(a) Indemnification by the Company........................................................12
(b) Indemnification by Holders of Registrable Securities..................................12
(c) Conduct of Indemnification Proceedings................................................13
(d) Contribution..........................................................................13
2.7 Participation in Underwriting Registrations....................................................14
2.8 Rule 144; Information..........................................................................14
SECTION 3. OTHER REGISTRATION RIGHTS
3.1 Future Rights..................................................................................15
3.2 Representation and Warranty....................................................................15
SECTION 4. MISCELLANEOUS
4.1 Recapitalization, Exchanges, etc...............................................................15
4.2 Opinions.......................................................................................16
4.3 Notices........................................................................................16
4.4 Applicable Law.................................................................................16
4.5 Amendment and Waiver...........................................................................16
4.6 Remedy for Breach of Contract..................................................................17
4.7 Severability...................................................................................17
4.8 Counterparts...................................................................................17
4.9 Headings.......................................................................................17
4.10 Binding Effect.................................................................................17
4.11 Entire Agreement...............................................................................17
4.12 Multiple Holders...............................................................................17
</TABLE>
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into
and made as of January 28, 1998, by and among ACR Group, Inc., a Texas
corporation having its headquarters at 3200 Wilcrest, #440, Houston, Texas 77042
(the "Company"), and The Catalyst Fund, Ltd., a Texas limited partnership having
its headquarters at Three Riverway, Suite 770, Houston, Texas 77056
("Catalyst").
The Company has agreed to grant certain demand and piggyback
registration rights to Catalyst in connection with the issuance by the Company
of the Warrant (as hereinafter defined) to Catalyst.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the panics hereto agree as
follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
have the respective meanings set forth below or set forth in the Section or
paragraph following such term:
ADVICE - Section 2.4.
AGENT - Section 2.6(a).
AGREEMENT- introductory paragraph.
BUSINESS DAY - day other than a Saturday, Sunday or legal holiday for
commercial banks in the State of Texas.
CATALYST- introductory paragraph.
COMMISSION- the Securities and Exchange Commission.
COMMON STOCK - the Company's Common Stock, $.01 par value per share, or
any successor class of the Company's Common Stock.
COMPANY- introductory paragraph.
DEMAND NOTICE - Section 2.2.(a)(i).
DEMAND REGISTRATION - Section 2.2(a)(1).
EXCHANGE ACT - the Securities Exchange Act of 1934, as amended.
Page 1 of 19
<PAGE> 4
HOLDER - Catalyst, any limited or general partner of Catalyst to whom
Registrable Securities are distributed by Catalyst and any Person holding
Registrable Securities.
HOLDERS' REPRESENTATIVE- Section 4.12.
INSPECTORS- Section 2.4(n).
LIABILITIES - Section 2.6(a).
1933 ACT - the Securities Act of 1933, as amended.
PERSON - any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or a political subdivision, agency or instrumentality thereof or
other entity or organization of any kind.
PIGGYBACK REGISTRATION - Section 2.1(a).
RECORDS- Section 2.4(n).
REGISTRABLE SECURITIES - any (i) shares of Common Stock or other
securities issued or issuable pursuant to the Warrant and (ii) any securities
issued in exchange for, as a dividend on, or in replacement or upon conversion
of, or otherwise issued in respect of (including securities issued in a stock
dividend, split or recombination or pursuant to the exercise of preemptive
rights), any shares of Common Stock or other securities described in clause (i),
until such time as such securities have been (w) distributed to the public
pursuant to a registration statement covering such securities that has been
declared effective under the 1933 Act, (x) distributed to the public in
accordance with the provisions of Rule 144 (or any similar provision then in
force) under the 1933 Act, (y) repurchased by the Company, or (z) registered
before issuance to a Holder.
REGISTRATION EXPENSES - Section 2.5.
WARRANT - that certain Warrant (No. 8) of even date herewith for the
purchase of 50,000 shares (subject to adjustment as provided therein) of Common
Stock granted by the Company to Catalyst and, collectively, any and all warrants
issued in substitution or replacement of such Warrant.
SECTION 2. REGISTRATION RIGHTS.
2.1 PIGGYBACK REGISTRATION.
(a) If the Company proposes to file a registration statement under the
1933 Act with respect to an offering by the Company for its own account or for
the account of any other Person of any class of equity security, including any
security convertible into or exchangeable for any equity security, then the
Company shall in each case give written notice of such proposed filing to the
Page 2 of 19
<PAGE> 5
Holder at least shiny days before the anticipated filing date, and such notice
shall offer the Holder the opportunity to register such number of Registrable
Securities as the Holder may request (a "Piggyback Registration"). The Company
shall use reasonable diligence to cause the managing underwriter or underwriters
of a proposed underwritten offering to permit the Holder to include the
Registrable Securities requested by the Holder to be included in the
registration statement and in such offering on the same terms and conditions as
any similar securities of the Company included therein, to the extent permitted
by applicable law. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such offering delivers a written opinion to the Holder that the
total amount of securities which the Holder requests to include in such offering
is sufficiently large to materially and adversely affect the success of such
offering, then the amount or kind of Registrable Securities to be offered for
the accounts of all Persons whose shares of Registrable Securities were
requested to be included in such offering shall be reduced pro rata with respect
to each such Person to the extent necessary to reduce the total amount of
securities to be included in such offering to the amount recommended by such
managing underwriter, such a reduction not to include shares of (i) if the
registration initially occurs at the insistence of the Company, the Company or
(ii) if such registration occurs due to a demand under a right similar to that
in Section 2.2 hereof, shares of the Person making that demand.
(b) Notwithstanding anything to the contrary contained in Section
2.1(a), the Company shall not be required to include Registrable Securities in
any registration statement pursuant to this Section 2.1 if the proposed
registration is (i) a registration of a stock option or other employee incentive
compensation plan or of securities-issued or issuable pursuant to any such plan,
(ii) a registration of securities issued or issuable pursuant to a stockholder
reinvestment plan or other similar plan, (iii) a registration of securities
issued in exchange for any securities or any assets of, or in connection with a
merger or consolidation with, an unaffiliated company, or (iv) a registration of
securities pursuant to a "rights" or other similar plan designed to protect the
Company's stockholders from a coercive or other attempt to take control of the
Company.
(c) The Company may withdraw any registration statement and abandon any
proposed offering initiated by the Company without the consent of the Holder
notwithstanding the request of the Holder to participate therein in accordance
with this provision, if the Company determines that such action is in the best
interests of the Company and its stockholders (for this purpose, the interests
of the Holder shall not be considered).
2.2 DEMAND REGISTRATION RIGHTS.
(a) RIGHT TO DEMAND.
(i) Subject to the conditions stated hereinafter in this Section
2.2(a), beginning 18 months after the date hereof, the Holder may make a written
request to the Company for registration with the Commission of the sale of all
or part of the Registrable Securities owned by the Holder under and in
accordance with the provisions of the 1933 Act (a "Demand Registration");
provided that the Company may if necessary delay the filing of any registration
statement relating to any such Demand Registration for such reasonable period of
time as is necessary to prepare the financial
Page 3 of 19
<PAGE> 6
statements of the Company for the fiscal period most recently ended prior to
such written request; provided further, however, that the Holder will use its
good-faith, reasonable efforts to time its requests for the Demand Registration
(within the meaning of Section 2.2(b)) in such a manner so as to minimize, to
the extent possible, the cost of such Demand Registration to the Company;
provided further, however, that the preceding proviso shall in no way limit the
rights of the Holder to realize the maximum possible value for their shares of
Registrable Securities to be offered to the public under such Demand
Registration; provided further that the effective date of any registration
statement relating to any such Demand Registration shall occur as soon as
practicable, and no later than 75 days after the written request for a Demand
Registration is made by the Holder or the Holders' Representative, as
applicable, in the manner described in the first sentence of this Section
2.2(a)(i) (unless a delay beyond such 75-day period occurs despite the Company's
having acted with diligence and good faith towards obtaining the effectiveness
of such registration statement within such 75-day period); and provided further
that in the event that more than one Person shall constitute the "Holder" under
this Agreement, any such written request for a Demand Registration may be made
only by the Holders' Representative.
(ii) All requests made pursuant to this Section 2.2(a) will specify the
amount and kind of securities to be registered, the Person or Persons who is the
owner of such Registrable Securities, and will also specify the intended methods
of disposition thereof. Notwithstanding anything to the contrary in this Section
2.2, the Company shall not be obligated to take any action with respect to a
request for a Demand Registration by the Holder unless such request would
involve the registration with the Commission of at least 100 shares of
Registrable Securities; and provided further, however, that if any other Person
shall have rights to request a Piggyback Registration of its securities in a
registration requested pursuant to this Agreement, the number of shares of
Securities requested by such Person to be included in a Demand Registration
pursuant hereto shall be counted towards determining whether the 100 share
threshold set forth in the first clause of this sentence shall have been
reached; and provided further, however, that if, in accordance with the
provisions of this sentence, the Company shall not be obligated to proceed with
a Demand Registration subsequent to a request therefor by the Holder, such
request shall be treated as if it had never been made, provided that the Company
gives the Holder as soon as practicable after the determination has been made
that fewer than 100 shares of Registrable Securities were requested to be
included therein by the Holder a notice stating that the Company will not
proceed with such requested Demand Registration and the reason therefor.
(b) NUMBER OF DEMAND REGISTRATIONS; PAYMENT OF EXPENSES. The Holder
shall be entitled to one (1) Demand Registration (which, except as provided to
the contrary in the immediately succeeding sentence, must become effective to
count as having occurred). The Holder shall pay all Registration Expenses (as
hereinafter defined) of the Demand Registration (and, until a Demand
Registration becomes effective, of each attempted Demand Registration that does
not become effective); provided, however, that if the Holder, prior to the date
that a Demand Registration becomes effective, chooses in its sole discretion not
to sell the Registrable Securities requested by it to be included in such Demand
Registration, such Demand Registration shall count as having occurred,
notwithstanding anything to the contrary in the first sentence of this Section
2.2(b); provided further that if (x) the Holder prior to the date that the
registration statement for a
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<PAGE> 7
Demand Registration has been filed with the Commission, chooses in its sole
discretion not to require the Company to file such registration statement
pursuant to a notice to such effect to the Company or (y) the Holder, prior to
the Date that the registration statement for a Demand Registration has been
filed with the Commission or thereafter but prior to the date that the Demand
Registration becomes effective, releases the Company of its obligation to
proceed toward obtaining the effectiveness of such registration statement for
such Demand Registration pursuant to a request for such release by the Company,
such Demand Registration shall not count as having occurred for purposes of this
Section 2.2(b) and the request for such Demand Registration shall be treated as
if it had never been made. The Company shall not be obligated to file a
registration statement on Form S-1 under the 1933 Act, or any successor forms,
with respect to a Demand Registration under Section 2.2(a), and the Company's
registration statement filing obligations pursuant to this Agreement may be
fulfilled by it by its filing, in accordance with the provisions of this
Agreement, of registration statements on Form S-2 or Form S-3 under the 1933
Act. or any successor forms.
(c) SELECTION OF UNDERWRITERS. If any Demand Registration is an
underwritten offering, the Holder will select a managing underwriter or
underwriters acceptable to the Company to administer the offering, which
acceptance will not be unreasonably withheld or delayed.
(d) COMPANY REGISTRATION. Notwithstanding the provisions of Sections
2.2(a)-(c),the Company shall not be obligated to effect a registration requested
pursuant to Sections 2.2(a)-(c) if (i) within 10 days after receiving the notice
provided by the Holder under Sections 2.2(a)-(c), the Company notifies Holder of
its intention to file a registration statement for a firm commitment
underwritten public offering of Common Stock for the account of the Company and,
within 120 days after providing such notice, the Company files a registration
statement for such offering and (ii) the Company has never before exercised its
rights under this Section 2.2(d). In such case, the Holder shall have all the
rights provided herein as if no such Demand Registration had been requested. If
at any time the Company fails to diligently pursue any such registration
statement or offering, the provisions of the first sentence of this Section
2.2(d) shall not apply, and the Company shall be obligated, upon abandoning such
registration statement for such offering for any reason, to satisfy its
obligations under Sections 2.2(a)-(c). With respect to such Company
registration, the Company shall have the sole authority to select or terminate
the employment of underwriters, and to make all decisions in connection with the
filing, effectiveness and consummation of the proposed offering, subject to the
express provisions hereof.
(e) LIMITATIONS ON REGISTRATION RIGHTS. The obligations of the Company
under Sections 2.2(a)-(c) are subject to each of the following limitations,
conditions and qualifications:
(1) The Company shall be entitled to postpone for a reasonable
period of time (not exceeding 60 days) the filing (but not the
preparation) of any registration statement otherwise required to be
prepared and filed by it pursuant hereto if, at the time the Company
receives a request for such registration, the Company is in possession
of material non-public information that would be required to be
disclosed in a registration statement but that has not been and will
otherwise not be disclosed to the public and the Company deems
disclosure not to be in the best interests of the Company and its
stockholders generally (without
Page 5 of 19
<PAGE> 8
considering the interests of the Holder). The Company shall be entitled
to postpone the filing of such a registration statement for additional
periods of time (not to exceed in any event an aggregate of 90 days) if
it delivers to the Holder an opinion of counsel to the effect that
there is a reasonable likelihood that the filing of a registration
statement would result in the disclosure of material nonpublic
information that would be required to be disclosed in a registration
statement, the disclosure of which at such time appears not to be in
the best interests of the Company and its stockholders.
(2) The Company shall be entitled to postpone for a reasonable
period of time (as short as practicable, but not exceeding 180 days)
the distribution of preliminary or final prospectuses under any
registration statement required to be prepared and filed by it pursuant
hereto, if at the time such distribution would otherwise be made the
Company is engaged in an issuer tender offer within the meaning of
Section 13(e) of the Exchange Act for securities of the same class as
the Registrable Securities that are proposed to be registered, unless
the Holder or the Holders' Representative, as applicable, can obtain a
no-action letter from the staff of the Commission to the effect that
the staff would not recommend enforcement action to the Commission if
offers or sales were made pursuant to a prospectus under such
circumstances.
(3) The Company shall be entitled to postpone for a reasonable
period of time (as short as practicable, but not exceeding 180 days)
the effectiveness (but not the filing or preparation) of any
registration statement otherwise required to be prepared and filed by
it pursuant hereto if, within 10 Business Days after it receives a
request for a registration pursuant hereto, the Company's investment
banking firm determines (and the Company so notifies the Holder) that
in its judgment, such registration and offering would materially
interfere with any financing, acquisition, corporate reorganization or
other material transaction involving the Company that prior to such
request the Board of Directors of the Company had agreed by resolution
to pursue.
(4) If, pursuant to a request for Demand Registration, the
Company delivers to the Holder or the Holders' Representative, as
applicable, an opinion of counsel to the effect that sales of
Registrable Securities thereunder might cause the Company to lose a
material amount of net operating losses or other tax carry forwards,
the Company may postpone the filing of the registration statement
otherwise required to be filed by it pursuant hereto, but only to the
extent required to protect such carry forwards, and only if it is first
determined that such protection cannot be effected by reducing the
number of securities being registered.
2.3 HOLDBACK AGREEMENTS; REQUIREMENTS OF THE HOLDER.
(a) RESTRICTIONS ON PUBLIC SALE BY THE HOLDER. To the extent not
inconsistent with applicable law, the Holder agrees that, during the Restriction
Period, as defined below, it will not
Page 6 of 19
<PAGE> 9
effect any public sale or distribution of the issue being registered or a
similar security of the Company or any securities convertible into or
exchangeable or exercisable for such securities, during the 14 days prior to,
and during the 90-day period beginning on, the effective date of such
registration statement (the "Restriction Period") (except as part of such
registration), but only if and to the extent requested in writing (with
reasonable prior notice) by the managing underwriter or underwriters in the case
of an underwritten public offering by the Company of securities similar to the
Registrable Securities.
(b) RESTRICTIONS PUBLIC SALE BY THE COMPANY. The Company agrees not to
effect any public sale or distribution of any securities being registered, or
any securities similar to those being registered, or any securities convertible
into or exchangeable or exercisable for such securities, during the 14 days
prior to, and during the 90-day period beginning on, the effective date of any
registration statement in which the Holder is participating (except (i) pursuant
to such registration statement, or (ii) pursuant to sales to employee stock
purchase or option plans which are exempt from the registration requirements of
the 1933 Act, or (iii) pursuant to any other stock option or similar agreements
which require the Company to issue securities in accordance with the terms of
such agreements, which issuances set forth in clauses (ii) and (iii) preceding
are exempt from the registration requirements of the 1933 Act).
(c) COOPERATION BY HOLDER. The offering of Registrable Securities by
the Holder shall comply in all respects with the applicable terms, provisions
and requirements set forth in this Agreement, and the Holder shall timely
provide the Company with all information and materials required to be included
in a registration statement that (a) relate to the offering, (b) are in
possession of the Holder, and (c) relate to the Holder, and to take all such
action as may be reasonably required in order not to delay the registration and
offering of the securities by the Company. The Company shall have no obligation
to include in such registration statement shares of the Holder if the Holder has
failed to furnish such information or materials and if, in the written opinion
of counsel to the Company, such information and materials are required in order
for the registration statement to be in compliance with the 1933 Act.
2.4 REGISTRATION PROCEDURES. Whenever any Registrable Securities are to
be registered pursuant to Sections 2.1 or 2.2, the Company will use reasonable
diligence to effect the registration of such Registrable Securities in
accordance with the intended method of disposition thereof as quickly as
practicable and in accordance with the provisions of Section 2. In connection
with any Piggyback Registration or Demand Registration, the Company shall as
expeditiously as possible:
(a) prepare and file with the Commission a registration statement that
includes the Registrable Securities requested to be included therein in
accordance with Section 2.1 or 2.2 and use reasonable diligence to cause such
registration statement to become effective; provided, however, that at least ten
Business Days before filing a registration statement or prospectus or any
amendment or supplement thereto, including documents incorporated by reference
therein, the Company will furnish to the Holder, and the underwriters, if any,
draft copies of all such documents proposed to be filed, which documents will be
subject to the review of the Holder and such underwriters, and the Company will
not file any registration statement or prospectus or amendment or supplement
thereto
Page 7 of 19
<PAGE> 10
(including such documents incorporated by reference) to which the Holder or the
underwriters with respect to such Registrable Securities, if any, shall
reasonably object; and provided further, however, that if the Company, in the
case of a Piggyback Registration, despite the reasonable objection of the Holder
desires to proceed with the registration of its shares, the Holder may withdraw
the Registrable Securities from being included in such offering, using its
good-faith efforts to minimize delay caused by such withdrawal, and the Company
may then, notwithstanding anything to the contrary in the immediately preceding
proviso, proceed with such offering; the Company and the Holder acknowledge that
such withdrawal by the Holder will delay such offering for as much time as is
necessary to amend such registration statement or prospectus to reflect the
withdrawal of such Registrable Securities from such offering;
(b) prepare and file with the Commission such amendments and
post-effective amendments to the registration statement as may be necessary to
keep the registration statement effective for a period of twenty-four months (or
such shorter period which will terminate when all Registrable Securities covered
by such registration statement have been sold or withdrawn, but not prior to the
expiration of the 90-day period referred to in Section 4(3) of the 1933 Act and
Rule 174 thereunder, if applicable); cause the prospectus to be supplemented by
any required prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the 1933 Act; and comply with the provisions of the 1933 Act
applicable to it with respect to the disposition of all securities covered by
such registration statement during the applicable period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
registration statement or supplement to the prospectus; the Company shall not be
deemed to have complied with its obligations hereunder to keep a registration
statement effective during the applicable period if it voluntarily takes any
action that would result in the prevention of the Holder from selling such
Registrable Securities during that period unless such action is required under
applicable law;
(c) furnish to the Holder and the underwriter or underwriters, if any,
without charge, such reasonable number of conformed copies of the registration
statement and any post-effective amendment thereto and such reasonable number of
copies of the prospectus (including each preliminary prospectus) and any
amendments or supplements thereto, and any documents incorporated by reference
therein, as the Holder or underwriter may request in order to facilitate the
disposition of the Registrable Securities being sold by the Holder (it being
understood that the Company consents to the use of the prospectus and any
amendment or supplement thereto by the Holder and the underwriter or
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by the prospectus or any amendment or supplement
thereto);
(d) notify the Holder at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, when the Company becomes aware of
the happening of any event as a result of which the prospectus included in such
registration statement (as then in effect) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and, as promptly as practicable thereafter, prepare and file with the
Commission and furnish a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such
Page 8 of 19
<PAGE> 11
Registrable Securities, such prospectus will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(e) use reasonable diligence to cause all Registrable Securities
included in such registration statement to be listed, by the date of the first
sale of Registrable Securities pursuant to such registration statement, on each
securities exchange (including, for this purpose, NASDAQ) on which the Common
Stock of the Company is then listed or proposed to be listed, if any;
(f) make generally available to its security holders an earnings
statement satisfying the provisions of Section 11(a) of the 1933 Act no later
than 45 days after the end of the 12-month period beginning with the first day
of the Company's first fiscal quarter commencing after the effective date of the
registration statement, which earnings statement shall cover said 12-month
period, which requirement will be deemed to be satisfied if the Company timely
files complete and accurate information on such forms and reports as the Company
may be required to file under the Exchange Act and otherwise complies with Rule
158 under the 1933 Act as soon as feasible;
(g) notify the Holder of any stop order issued or threatened by the
Commission in connection therewith and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered, and make every
reasonable effort to obtain the withdrawal of any order suspending the
effectiveness of the registration statement at the earliest possible moment;
(h) if requested by the managing underwriter or underwriters, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or underwriters or the Holder reasonably
requests to be included therein, including, without limitation, the purchase
price being paid therefor by such underwriter or underwriters and any other
terms of the underwritten offering of such Registrable Securities (excluding,
however, information with respect to the number of Registrable Securities being
sold to such underwriter or underwriters by the Holder), and promptly make all
required filings of such prospectus supplement or post-effective amendment;
(i) as promptly as practicable after filing with the Commission of any
document which is incorporated by reference into a registration statement,
deliver to the Holder as many copies of that document as may be reasonably
requested by the Holder;
(j) on or prior to the date on which the registration statement is
declared effective, use reasonable diligence to register or qualify, and
cooperate with the Holder the underwriter or underwriters, if any, and their
counsel, in connection with the registration or qualification of the Registrable
Securities covered by the registration statement for offer and sale under the
securities or blue sky laws of each state and other jurisdiction of the United
States as the Holder or underwriter reasonably requests in writing, to use
reasonable diligence to keep each such registration or qualification effective,
including through new filings, or amendments or renewals, during the period such
registration statement is required to be kept effective and to do any and all
other acts or things
Page 9 of 19
<PAGE> 12
necessary or advisable to enable the disposition in all such jurisdictions of
the Registrable Securities covered by the applicable registration statement;
provided that the Company will not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action which would subject it to general service of process in any such
jurisdiction where it is not then so subject; and provided, further, however,
that while it is the present intention of the Holder to cooperate with the
Company to keep the costs of compliance with state blue sky laws to a minimum,
the Holder shall have the right to require compliance by the Company with the
blue sky laws of as many states as the managing underwriter deems reasonably
necessary in its good faith judgment to realize the maximum possible value for
the Registrable Securities included in such registration statement;
(k) cooperate with the Holder and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing securities to be sold under the registration statement
and enable such securities to be in such denominations and registered in such
names as the managing underwriter or underwriters, if any, may request, subject
to the underwriters' obligation to return any certificates representing
securities not sold;
(l) use reasonable diligence to cause the Registrable Securities
covered by the registration statement to be registered with or approved by such
other governmental agencies or authorities within the United States as may be
necessary to enable the seller or sellers thereof or the underwriter or
underwriters, if any, to consummate the disposition of such securities;
(m) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other reasonable actions as the
Holder or the underwriters retained by the Holder participating in an
underwritten public offering, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities;
(n) make available for inspection by the Holder any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent retained by any such seller or
underwriter (collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be necessary to enable them to exercise their due diligence
responsibility; and cause the Company's officers, directors and employees
to-make available for inspection and/or copying all Records reasonably requested
by any such Inspector in connection with such registration statement; provided
however, that in the case of a second Demand Registration (within the meaning of
Section 2.2(b)), the Holder shall bear the out-of-pocket costs of copying such
documents as are requested by any such Inspector in accordance with this Section
2.4(n); and
(o) use reasonable diligence to obtain a "cold comfort" letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by cold comfort letters covering
registration statements similar to the registration statement at issue as the
Holder reasonably requests.
Page 10 of 19
<PAGE> 13
The Holder, upon receipt of any notice from the Company of the
occurrence of any event of the kind described in subsection (d) of this Section
2.4, will forthwith discontinue disposition of the Registrable Securities until
the Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by subsection (d) of this Section 2.4 and copies of any additional
or supplemental filings which are incorporated by reference in the prospectus,
or until it is advised in writing (the "Advice") by the Company that the use of
the prospectus may be resumed. If so directed by the Company, the Holder shall
deliver to the Company (at the Company's expense) all copies in its possession
or control, other than permanent file copies then in the Holder's possession, of
the prospectus covering such Registrable Securities. In the event the Company
shall give any such notice, the time periods mentioned in subsection (b) of this
Section 2.4 shall be extended by the number of days during the period from and
including the date of the giving of such notice to and including the date when
each seller of Registrable Securities covered by such registration statement
shall have received the copies of the supplemented or amended prospectus
contemplated by subsection (d) of this Section 2.4 hereof or the Advice.
If such registration statement refers to the Holder by name or
otherwise as the holder of any securities of the Company then the Holder shall
have the right to require (i) the insertion therein of language, in form and
substance satisfactory to the Holder to the effect that the holding by such
Holder of such securities is not to be construed as a recommendation of such
Holder of the investment quality of the Company's securities covered thereby and
that such holding does not imply that the Holder will assist in meeting any
future financial requirements of the Company, or (ii) in the event that such
reference to such Holder by name or otherwise is not required by the Securities
Act or any similar federal statute then in force, the deletion of the reference
to such Holder.
2.5 REGISTRATION EXPENSES. Except as otherwise provided in Section
2.2(b), all expenses incident to the Company's performance of or compliance with
this Agreement, including without limitation, all Commission and securities
exchange or National Association of Securities Dealers, Inc. registration and
filing fees, all fees and expenses (other than the pro rata portion of filing
fees that are required by state law with respect to the securities to be sold)
relating to compliance with securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), all printing expenses, messenger and delivery expenses,
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), fees and
expenses incurred in connection with the listing of the securities to be
registered on securities exchanges, fees and disbursements of counsel for the
Company and its independent certified public accountants (including the expenses
required for "cold comfort" letters required by or incident to such
performance), and fees and expenses of any special experts retained by the
Company in connection with such registration (but not including any underwriting
fees, discounts or commissions directly attributable to the sale of Registrable
Securities) (all such expenses being herein called "Registration Expenses"),
will be home by the Company; provided, however that, the Company shall not be
obligated to pay (i) the fees and disbursements of any counsel for the Holder or
liability insurance (if the Company elects to obtain such insurance) for the
Holder, or (ii) any out-of-pocket expenses of the Holder, which fees,
disbursements and expenses described in clauses (i) and (ii) preceding shall be
borne by the Holder, and provided that the Holder shall bear its pro rata
portion of any underwriting fees, discounts or
Page 11 of 19
<PAGE> 14
commissions directly attributable to any sale of Registrable Securities in which
the Holder participates.
2.6 INDEMNIFICATION; CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless each Holder of Registrable Securities, its officers, directors,
partners and each Person who controls such Holder (within the meaning of the
1933 Act), and any Agent (as hereinafter defined) or investment advisor thereof
against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation, and attorneys fees and expenses as further
provided in Section 2.6(c)) (collectively, "Liabilities") arising out of or
based upon any untrue or alleged untrue statement of material fact contained in
any registration statement, any amendment or supplement thereto, or any
prospectus or preliminary prospectus contained therein, 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, except insofar as
any such Liabilities arise out of or are based upon any untrue statement or
omission based upon information with respect to such indemnified Person
furnished in writing to the Company by such indemnified Person expressly for use
therein. In connection with an underwritten offering, the Company will indemnify
the underwriters thereof, their officers and directors and each Person who
controls such underwriters (within the meaning of the 1933 Act) to the same
extent as provided above with respect to the indemnification of the Holders of
Registrable Securities or to such other extent as the Company and such
underwriters may agree. For purposes of this Section 2.6(a), an "Agent" of a
Holder of Registrable Securities is any Person acting for or on behalf of such
Holder with respect to the holding or sale of such Registrable Securities.
(b) INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. In connection
with any registration statement in which the Holder is participating, the Holder
will furnish to the Company in writing such information with respect to the name
and address of the Holder and the amount of Registrable Securities held by the
Holder and such other information as the Company shall reasonably request for
use in connection with any such registration statement or prospectus, and agrees
to indemnify, to the extent permitted by law, the Company, its directors and
officers and each Person who controls the Company (within the meaning of the
1933 Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue statement of a material fact or any omission of a
material fact required to be stated in the registration statement or prospectus
or any amendment thereof or supplement thereto or necessary to make the
statements therein not misleading! to the extent. but only to the extent, that
such untrue statement or omission is based upon any information with respect to
the Holder so furnished in writing by the Holder specifically for inclusion in
any prospectus or registration statement. In connection with an underwritten
offering, the Holder participating in such offering will indemnify the
underwriters thereof, their officers and directors and each Person who controls
such underwriters (within the meaning of the 1933 Act) to the same extent as
provided in the immediately preceding sentence with respect to indemnification
of the Company. In no event shall the liability of the Holder hereunder be
greater in amount than the dollar amount of the proceeds received by the Holder
upon the sale of the Registrable Securities giving rise to such indemnification
obligation.
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<PAGE> 15
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled to
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such Person of any written notice of the
commencement of any action, suit, proceeding or investigation or threat thereof
made in writing for which such Person may claim indemnification or contribution
pursuant to this Agreement and, unless in the written opinion of counsel for
such indemnified party a conflict of interest may exist between such indemnified
party and the indemnifying party with respect to such claim, permit the
indemnifying party to assume, at the sole cost and expense of the indemnifying
party, the defense of such claim with counsel reasonably satisfactory to such
indemnified party. Whether or not such defense is assumed by the indemnifying
party, the indemnifying party will not be subject to any liability for any
settlement made without its consent. No indemnifying party will 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 of such claim or
litigation. If the indemnifying party is not entitled to, or elects not to,
assume the defense of a claim, the indemnified party shall be entitled to hire
counsel reasonably satisfactory to it, the fees and expenses of which shall be
borne by, in their entirety, the indemnifying party; provided, however, that the
indemnifying party shall not be obligated to pay the fees and expenses of more
than one counsel with respect to such claim, unless in the opinion of counsel
for any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels.
(d) CONTRIBUTION. If the indemnification provided for in this Section
2.6 from the indemnifying party is unavailable to an indemnified party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the 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, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 2.6(c), any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 2.6(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 2.6(d), the Holder shall not be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable
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<PAGE> 16
Securities of the Holder were offered to the public exceeds the amount of any
damages which the Holder has otherwise been required to pay by reason of such
untrue statement or omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(0 of the 1933 Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
The obligations of the Company pursuant to this Section 2.6 shall be
further subject to such additional express agreements of the Company as may be
required to facilitate an underwritten offering, provided that no such agreement
shall in any way limit the rights of the Holder under this Agreement, or create
additional obligations of the Holder not set forth herein, except as otherwise
expressly agreed in writing by the Holder.
2.7 PARTICIPATION IN UNDERWRITING REGISTRATIONS. Holder may not
participate in any underwritten registration hereunder unless the Holder (a)
agrees to sell its securities on the terms of and on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements (which shall be (i) the Company in the case of an offering of
securities by the Company and (ii) the Holder in the case of a Demand
Registration) and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
2.8 RULE 144; INFORMATION. The Company covenants that, upon any
registration statement covering Company securities becoming effective, it will
file the reports required to be filed by it under the 1933 Act and the Exchange
Act and the rules and regulations adopted by the Commission thereunder (or, if
the Company is not required to file such reports, it will, upon the request of
the Holder make publicly available other nonconfidential information as is
necessary to permit sales under Rule 144 under the 1933 Act), and it will take
such other action as the Holder may reasonably request, all to the extent
required from time to time to enable the Holder to sell Registrable Securities
without registration under the 1933 Act within the limitation of the exemptions
provided by (a) Rule 144 under the 1933 Act, as such Rule may be amended from
time to time, or (b) any similar rule or regulation hereafter adopted by the
Commission; provided further that if the Company is not required to file reports
under the 1933 Act and the Exchange Act and the rules and regulations adopted by
the Commission thereunder, the Company shall, upon the request of the Holder,
provide the Holder audited financial statements and access to the books and
records of the Company and, if requested by the Holder sufficient information to
enable the Holder to comply with Rule 144 or Rule 144A under the 1933 Act. Upon
the request of the Holder, the Company will deliver to the Holder a written
statement as to whether it has complied with such requirements.
SECTION 3. OTHER REGISTRATION RIGHTS.
3.1 FUTURE RIGHTS. From the date of this Agreement until the earlier to
occur of the sixth anniversary hereof or the date that all Registrable
Securities have been registered under the 1933 Act, the Company will not grant
to any Person (excluding the Holder) any registration rights with respect to any
securities of the Company other than registration rights ("new rights") that are
granted in
Page 14 of 19
<PAGE> 17
connection with the investment in the Company by such grantee of at least
$1,000,000. Such new rights must (i) be subordinate to and of a lesser priority
than the registration rights granted by the Company under this Agreement, (ii)
be approved in writing by the Holder, and (iii) not be inconsistent with the
terms of this Agreement. Additionally, new rights may not be granted without
expressly providing that, with respect to demand registration rights granted to
such other Persons, the Holder have a piggyback right upon the exercise of such
new rights and shall be included in any related registration statement on the
same terms and conditions as the holders of the new rights, subject to possible
reduction at the initiative of the managing underwriter or underwriters, on
terms substantially equivalent to those set forth in Section 2.1. The Company
may grant registration rights that permit any Person the right to piggyback or
may itself exercise the right to piggyback on any Demand Registration; provided
that if the managing underwriter or underwriters of such offering delivers an
opinion to the Holder that the total amount of securities which they and the
holders of such piggyback rights intend to include in any offering is so large
as to materially and adversely affect the success of such offering (including
the price at which such securities can be sold), then the amount or kind of
securities to be offered for the account of holders of such piggyback rights, or
the Company if it is exercising piggyback rights, will be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by the managing underwriter prior to any
reduction in the amount of Registrable Securities to be included; and further
provided that if such offering is not underwritten, then any such piggyback
shall only be exercised with the consent of the Holder.
3.2 REPRESENTATION AND WARRANT. The Company hereby represents and
warrants to Catalyst that on or prior to the date hereof, (a) the Company has
not granted registration rights to any Person except for the registration rights
granted under this Agreement, and (b) no consent, approval, authorization or
waiver of any Person is required to permit the Company to (i) execute or deliver
this Agreement or (ii) perform this Agreement in accordance with its terms other
than with respect to registration under the 1933 Act and comparable
registrations with state securities commissions.
SECTION 4. MISCELLANEOUS.
4.1 RECAPITALIZATION, EXCHANGES, ETC. The provisions of this Agreement
shall apply, to the full extent set forth herein with respect to the Registrable
Securities, to any and all shares of equity capital of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in exchange for, or in
substitution of the Registrable Securities, in each case as the amounts of such
securities outstanding are appropriately adjusted for any equity dividends,
splits, reverse splits, combinations, recapitalization and the like occurring
after the date of this Agreement.
4.2 OPINIONS. When any legal opinion is required to be delivered
hereunder, such opinion may contain such qualifications as may be customary or
otherwise appropriate for legal opinions in similar circumstances.
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<PAGE> 18
4.3 NOTICES. (a) All communications under this Agreement shall be in
writing to the following addresses:
(i) If to Company, to:
ACR Group, Inc.
3200 Wilcrest, #440
Houston, Texas 77042
Attention: Tony Maresca, Senior Vice
President and Chief Financial
Officer
Facsimile No.: (713) 780-4067
(ii) If to the Holder, to:
The Catalyst Fund, Ltd.
Three Riverway, Suite 770
Houston, Texas 77056
Attention: Ron Nixon
Facsimile No.: (713) 623-0473
or to such other address as any party may furnish to the others in writing in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
(b) Any communication so addressed and mailed by first class registered
or certified mail, postage prepaid, shall be deemed to be received on the third
Business Day after so mailed, and if delivered by personal delivery (including
by courier) or facsimile to such address, upon delivery during normal business
hours.
4.4 APPLICABLE LAW. This contract is entered into under, and shall be
governed for all purposes by, the laws of the State of Texas.
4.5 AMENDMENT AND WAIVER. This Agreement may be amended, and the
provisions hereof may be waived, only by a written instrument signed by the
Holder and the Company. No failure by either party hereto at any time to give
notice of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
4.6 REMEDY FOR BREACH OF CONTRACT. The parties agree that in the event
there is any breach or asserted breach of the terms, covenants or conditions of
this Agreement, the remedy of the parties hereto shall be in law and in equity
and injunctive relief shall lie for the enforcement of or relief from any
provisions of this Agreement. If any remedy or relief is sought and obtained by
any party against one of the other parties pursuant to this Section 4.6, the
other party shall, in addition
Page 16 of 19
<PAGE> 19
to the remedy of relief so obtained, be liable to the party seeking such remedy
or relief for the reasonable expenses incurred by such party in successfully
obtaining such remedy or relief, including the fees and expenses of such party's
counsel.
4.7 SEVERABILITY. It is a desire and intent of the parties that the
terms, provisions, covenants and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant or remedy of this Agreement or the application thereof to any Person or
circumstances shall, to any extent, be construed to be invalid or unenforceable
in whole or in part, then such term, provision, covenant or remedy shall be
construed in a manner so as to permit its enforceability under the applicable
law to the fullest extent permitted by law. In any case, the remaining
provisions of this Agreement or the application thereof to any Person or
circumstances other than those to which they have been held invalid or
unenforceable, shall remain in full force and effect.
4.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
4.9 HEADINGS. The section and paragraph headings have been inserted for
purposes of convenience and shall not be used for interpretive purposes.
4.10 BINDING EFFECT. Unless otherwise provided herein, the provisions
of this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
permitted assigns, and is not intended to confer upon any other Person any right
or remedies hereunder, provided, however, that a transferee of Holder shall be
deemed to be a Holder for purposes of obtaining the benefits or enforcing the
rights of a Holder.
4.11 ENTIRE AGREEMENT. This Agreement, together with the other
agreements referenced herein, constitutes the entire agreement and supersedes
all prior agreements, understandings, both written and oral, among the parties
with respect to the subject matter hereof.
4.12 MULTIPLE HOLDERS. In the event that more than one Person shall
constitute the "Holder" under this Agreement each such Person shall have the
rights and duties of the Holder hereunder with respect to its Registerable
Securities but not those of any other such Persons. In that event, however,
Catalyst (or if Catalyst no longer is a Person constituting the Holder, such
other Person as all of the Persons constituting the Holder shall designate with
the Company's consent) shall act as representative of all such Persons
constituting the Holder (the "Holders' Representative") for the purposes of
giving and receiving consents, notices, amendments, and documents and exercising
the rights of the Holder. Accordingly, if more than one Person shall constitute
the Holder (a) any amendment signed by the Holders' Representative shall be
conclusively deemed, as between the parties hereto, as having been signed by the
Holder, (b) any consent required or permitted to be obtained from the Holder
shall be obtained only from the Holders' Representative, and (c) any notice
required to be given or document delivered pursuant to this Agreement shall be
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<PAGE> 20
deemed duly given or delivered only if given to the Holders' Representative in
accordance with Section 4.3. In no event, however, shall the Holder's
Representative or any other Person constituting the Holder be liable for
information supplied by a Person constituting the Holder, and that Person and
the Company shall deal directly with each other with respect to matters in
Section 2.6.
Page 18 of 19
<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ACR GROUP, INC.
By:
--------------------------------
Alex Trevino, Jr., President
THE CATALYST FUND, LTD.
By: RDR Management I, Inc.,
its general partner
By:
-------------------------
Ron Nixon, Vice President
Page 19 of 19
<PAGE> 1
EXHIBIT 10.13
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
DATED AS OF JANUARY 28, 1998
BY AND BETWEEN
SOUTHWEST/CATALYST CAPITAL, LTD.
AND
ACR GROUP, INC.
- --------------------------------------------------------------------------------
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Section 1. DEFINITIONS
Section 2. REGISTRATION RIGHTS
2.1 Piggyback Registration..........................................................................2
2.2 Demand Registration Rights......................................................................3
(a) Right to Demand........................................................................3
(b) Number of Demand Registrations; Payment of Expenses....................................4
(c) Selection of Underwriters..............................................................5
(d) Company Registration...................................................................5
(e) Limitations on Registration Rights.....................................................5
2.3 Holdback Agreements; Requirements of the Holder.................................................7
(a) Restrictions on Public Sale by the Holder..............................................7
(b) Restrictions on Public Sale by the Company.............................................7
(c) Cooperation by Holder..................................................................7
2.4 Registration Procedures.........................................................................7
2.5 Registration Expenses..........................................................................11
2.6 Indemnification; Contribution..................................................................12
(a) Indemnification by the Company........................................................12
(b) Indemnification by Holders of Registrable Securities..................................12
(c) Conduct of Indemnification Proceedings................................................13
(d) Contribution..........................................................................13
2.7 Participation in Underwriting Registrations....................................................14
2.8 Rule 144; Information..........................................................................14
SECTION 3. OTHER REGISTRATION RIGHTS
3.1 Future Rights..................................................................................15
3.2 Representation and Warranty....................................................................15
SECTION 4. MISCELLANEOUS
4.1 Recapitalization, Exchanges, etc...............................................................15
4.2 Opinions.......................................................................................16
4.3 Notices........................................................................................16
4.4 Applicable Law.................................................................................16
4.5 Amendment and Waiver...........................................................................16
4.6 Remedy for Breach of Contract..................................................................17
4.7 Severability...................................................................................17
4.8 Counterparts...................................................................................17
4.9 Headings.......................................................................................17
4.10 Binding Effect.................................................................................17
4.11 Entire Agreement...............................................................................17
4.12 Multiple Holders...............................................................................17
</TABLE>
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into
and made as of January 28, 1998, by and among ACR Group, Inc., a Texas
corporation having its headquarters at 3200 Wilcrest, #440, Houston, Texas 77042
(the "Company"), and Southwest/Catalyst Capital, Ltd., a Texas limited
partnership having its headquarters at Three Riverway, Suite 770, Houston, Texas
77056 ("SWCC").
The Company has agreed to grant certain demand and piggyback
registration rights to SWCC in connection with the issuance by the Company of
the Warrant (as hereinafter defined) to SWCC.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the panics hereto agree as
follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
have the respective meanings set forth below or set forth in the Section or
paragraph following such term:
ADVICE - Section 2.4.
AGENT - Section 2.6(a).
AGREEMENT- introductory paragraph.
BUSINESS DAY - day other than a Saturday, Sunday or legal holiday for
commercial banks in the State of Texas.
SWCC- introductory paragraph.
COMMISSION- the Securities and Exchange Commission.
COMMON STOCK - the Company's Common Stock, $.01 par value per share, or
any successor class of the Company's Common Stock.
COMPANY- introductory paragraph.
DEMAND NOTICE - Section 2.2.(a)(i).
DEMAND REGISTRATION - Section 2.2(a)(1).
EXCHANGE ACT - the Securities Exchange Act of 1934, as amended.
Page 1 of 19
<PAGE> 4
HOLDER - SWCC, any limited or general partner of SWCC to whom
Registrable Securities are distributed by SWCC and any Person holding
Registrable Securities.
HOLDERS' REPRESENTATIVE- Section 4.12.
INSPECTORS- Section 2.4(n).
LIABILITIES - Section 2.6(a).
1933 ACT - the Securities Act of 1933, as amended.
PERSON - any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or a political subdivision, agency or instrumentality thereof or
other entity or organization of any kind.
PIGGYBACK REGISTRATION - Section 2.1(a).
RECORDS- Section 2.4(n).
REGISTRABLE SECURITIES - any (i) shares of Common Stock or other
securities issued or issuable pursuant to the Warrant and (ii) any securities
issued in exchange for, as a dividend on, or in replacement or upon conversion
of, or otherwise issued in respect of (including securities issued in a stock
dividend, split or recombination or pursuant to the exercise of preemptive
rights), any shares of Common Stock or other securities described in clause (i),
until such time as such securities have been (w) distributed to the public
pursuant to a registration statement covering such securities that has been
declared effective under the 1933 Act, (x) distributed to the public in
accordance with the provisions of Rule 144 (or any similar provision then in
force) under the 1933 Act, (y) repurchased by the Company, or (z) registered
before issuance to a Holder.
REGISTRATION EXPENSES - Section 2.5.
WARRANT - that certain Warrant (No.7) of even date herewith for the
purchase of 125,000 shares (subject to adjustment as provided therein) of Common
Stock granted by the Company to SWCC and, collectively, any and all warrants
issued in substitution or replacement of such Warrant.
SECTION 2. REGISTRATION RIGHTS.
2.1 PIGGYBACK REGISTRATION.
(a) If the Company proposes to file a registration statement under the
1933 Act with respect to an offering by the Company for its own account or for
the account of any other Person of any class of equity security, including any
security convertible into or exchangeable for any equity security, then the
Company shall in each case give written notice of such proposed filing to the
Page 2 of 19
<PAGE> 5
Holder at least shiny days before the anticipated filing date, and such notice
shall offer the Holder the opportunity to register such number of Registrable
Securities as the Holder may request (a "Piggyback Registration"). The Company
shall use reasonable diligence to cause the managing underwriter or underwriters
of a proposed underwritten offering to permit the Holder to include the
Registrable Securities requested by the Holder to be included in the
registration statement and in such offering on the same terms and conditions as
any similar securities of the Company included therein, to the extent permitted
by applicable law. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such offering delivers a written opinion to the Holder that the
total amount of securities which the Holder requests to include in such offering
is sufficiently large to materially and adversely affect the success of such
offering, then the amount or kind of Registrable Securities to be offered for
the accounts of all Persons whose shares of Registrable Securities were
requested to be included in such offering shall be reduced pro rata with respect
to each such Person to the extent necessary to reduce the total amount of
securities to be included in such offering to the amount recommended by such
managing underwriter, such a reduction not to include shares of (i) if the
registration initially occurs at the insistence of the Company, the Company or
(ii) if such registration occurs due to a demand under a right similar to that
in Section 2.2 hereof, shares of the Person making that demand.
(b) Notwithstanding anything to the contrary contained in Section
2.1(a), the Company shall not be required to include Registrable Securities in
any registration statement pursuant to this Section 2.1 if the proposed
registration is (i) a registration of a stock option or other employee incentive
compensation plan or of securities-issued or issuable pursuant to any such plan,
(ii) a registration of securities issued or issuable pursuant to a stockholder
reinvestment plan or other similar plan, (iii) a registration of securities
issued in exchange for any securities or any assets of, or in connection with a
merger or consolidation with, an unaffiliated company, or (iv) a registration of
securities pursuant to a "rights" or other similar plan designed to protect the
Company's stockholders from a coercive or other attempt to take control of the
Company.
(c) The Company may withdraw any registration statement and abandon any
proposed offering initiated by the Company without the consent of the Holder
notwithstanding the request of the Holder to participate therein in accordance
with this provision, if the Company determines that such action is in the best
interests of the Company and its stockholders (for this purpose, the interests
of the Holder shall not be considered).
2.2 DEMAND REGISTRATION RIGHTS.
(a) RIGHT TO DEMAND.
(i) Subject to the conditions stated hereinafter in this Section
2.2(a), beginning 18 months after the date hereof, the Holder may make a written
request to the Company for registration with the Commission of the sale of all
or part of the Registrable Securities owned by the Holder under and in
accordance with the provisions of the 1933 Act (a "Demand Registration");
provided that the Company may if necessary delay the filing of any registration
statement relating to any such Demand Registration for such reasonable period of
time as is necessary to prepare the financial
Page 3 of 19
<PAGE> 6
statements of the Company for the fiscal period most recently ended prior to
such written request; provided further, however, that the Holder will use its
good-faith, reasonable efforts to time its requests for the Demand Registration
(within the meaning of Section 2.2(b)) in such a manner so as to minimize, to
the extent possible, the cost of such Demand Registration to the Company;
provided further, however, that the preceding proviso shall in no way limit the
rights of the Holder to realize the maximum possible value for their shares of
Registrable Securities to be offered to the public under such Demand
Registration; provided further that the effective date of any registration
statement relating to any such Demand Registration shall occur as soon as
practicable, and no later than 75 days after the written request for a Demand
Registration is made by the Holder or the Holders' Representative, as
applicable, in the manner described in the first sentence of this Section
2.2(a)(i) (unless a delay beyond such 75-day period occurs despite the Company's
having acted with diligence and good faith towards obtaining the effectiveness
of such registration statement within such 75-day period); and provided further
that in the event that more than one Person shall constitute the "Holder" under
this Agreement, any such written request for a Demand Registration may be made
only by the Holders' Representative.
(ii) All requests made pursuant to this Section 2.2(a) will specify the
amount and kind of securities to be registered, the Person or Persons who is the
owner of such Registrable Securities, and will also specify the intended methods
of disposition thereof. Notwithstanding anything to the contrary in this Section
2.2, the Company shall not be obligated to take any action with respect to a
request for a Demand Registration by the Holder unless such request would
involve the registration with the Commission of at least 100 shares of
Registrable Securities; and provided further, however, that if any other Person
shall have rights to request a Piggyback Registration of its securities in a
registration requested pursuant to this Agreement, the number of shares of
Securities requested by such Person to be included in a Demand Registration
pursuant hereto shall be counted towards determining whether the 100 share
threshold set forth in the first clause of this sentence shall have been
reached; and provided further, however, that if, in accordance with the
provisions of this sentence, the Company shall not be obligated to proceed with
a Demand Registration subsequent to a request therefor by the Holder, such
request shall be treated as if it had never been made, provided that the Company
gives the Holder as soon as practicable after the determination has been made
that fewer than 100 shares of Registrable Securities were requested to be
included therein by the Holder a notice stating that the Company will not
proceed with such requested Demand Registration and the reason therefor.
(b) NUMBER OF DEMAND REGISTRATIONS; PAYMENT OF EXPENSES. The Holder
shall be entitled to one (1) Demand Registration (which, except as provided to
the contrary in the immediately succeeding sentence, must become effective to
count as having occurred). The Holder shall pay all Registration Expenses (as
hereinafter defined) of the Demand Registration (and, until a Demand
Registration becomes effective, of each attempted Demand Registration that does
not become effective); provided, however, that if the Holder, prior to the date
that a Demand Registration becomes effective, chooses in its sole discretion not
to sell the Registrable Securities requested by it to be included in such Demand
Registration, such Demand Registration shall count as having occurred,
notwithstanding anything to the contrary in the first sentence of this Section
2.2(b); provided further that if (x) the Holder prior to the date that the
registration statement for a
Page 4 of 19
<PAGE> 7
Demand Registration has been filed with the Commission, chooses in its sole
discretion not to require the Company to file such registration statement
pursuant to a notice to such effect to the Company or (y) the Holder, prior to
the Date that the registration statement for a Demand Registration has been
filed with the Commission or thereafter but prior to the date that the Demand
Registration becomes effective, releases the Company of its obligation to
proceed toward obtaining the effectiveness of such registration statement for
such Demand Registration pursuant to a request for such release by the Company,
such Demand Registration shall not count as having occurred for purposes of this
Section 2.2(b) and the request for such Demand Registration shall be treated as
if it had never been made. The Company shall not be obligated to file a
registration statement on Form S-1 under the 1933 Act, or any successor forms,
with respect to a Demand Registration under Section 2.2(a), and the Company's
registration statement filing obligations pursuant to this Agreement may be
fulfilled by it by its filing, in accordance with the provisions of this
Agreement, of registration statements on Form S-2 or Form S-3 under the 1933
Act. or any successor forms.
(c) SELECTION OF UNDERWRITERS. If any Demand Registration is an
underwritten offering, the Holder will select a managing underwriter or
underwriters acceptable to the Company to administer the offering, which
acceptance will not be unreasonably withheld or delayed.
(d) COMPANY REGISTRATION. Notwithstanding the provisions of Sections
2.2(a)-(c),the Company shall not be obligated to effect a registration requested
pursuant to Sections 2.2(a)-(c) if (i) within 10 days after receiving the notice
provided by the Holder under Sections 2.2(a)-(c), the Company notifies Holder of
its intention to file a registration statement for a firm commitment
underwritten public offering of Common Stock for the account of the Company and,
within 120 days after providing such notice, the Company files a registration
statement for such offering and (ii) the Company has never before exercised its
rights under this Section 2.2(d). In such case, the Holder shall have all the
rights provided herein as if no such Demand Registration had been requested. If
at any time the Company fails to diligently pursue any such registration
statement or offering, the provisions of the first sentence of this Section
2.2(d) shall not apply, and the Company shall be obligated, upon abandoning such
registration statement for such offering for any reason, to satisfy its
obligations under Sections 2.2(a)-(c). With respect to such Company
registration, the Company shall have the sole authority to select or terminate
the employment of underwriters, and to make all decisions in connection with the
filing, effectiveness and consummation of the proposed offering, subject to the
express provisions hereof.
(e) LIMITATIONS ON REGISTRATION RIGHTS. The obligations of the Company
under Sections 2.2(a)-(c) are subject to each of the following limitations,
conditions and qualifications:
(1) The Company shall be entitled to postpone for a reasonable
period of time (not exceeding 60 days) the filing (but not the
preparation) of any registration statement otherwise required to be
prepared and filed by it pursuant hereto if, at the time the Company
receives a request for such registration, the Company is in possession
of material non-public information that would be required to be
disclosed in a registration statement but that has not been and will
otherwise not be disclosed to the public and the Company deems
disclosure not to be in the best interests of the Company and its
stockholders generally (without
Page 5 of 19
<PAGE> 8
considering the interests of the Holder). The Company shall be entitled
to postpone the filing of such a registration statement for additional
periods of time (not to exceed in any event an aggregate of 90 days) if
it delivers to the Holder an opinion of counsel to the effect that
there is a reasonable likelihood that the filing of a registration
statement would result in the disclosure of material nonpublic
information that would be required to be disclosed in a registration
statement, the disclosure of which at such time appears not to be in
the best interests of the Company and its stockholders.
(2) The Company shall be entitled to postpone for a reasonable
period of time (as short as practicable, but not exceeding 180 days)
the distribution of preliminary or final prospectuses under any
registration statement required to be prepared and filed by it pursuant
hereto, if at the time such distribution would otherwise be made the
Company is engaged in an issuer tender offer within the meaning of
Section 13(e) of the Exchange Act for securities of the same class as
the Registrable Securities that are proposed to be registered, unless
the Holder or the Holders' Representative, as applicable, can obtain a
no-action letter from the staff of the Commission to the effect that
the staff would not recommend enforcement action to the Commission if
offers or sales were made pursuant to a prospectus under such
circumstances.
(3) The Company shall be entitled to postpone for a reasonable
period of time (as short as practicable, but not exceeding 180 days)
the effectiveness (but not the filing or preparation) of any
registration statement otherwise required to be prepared and filed by
it pursuant hereto if, within 10 Business Days after it receives a
request for a registration pursuant hereto, the Company's investment
banking firm determines (and the Company so notifies the Holder) that
in its judgment, such registration and offering would materially
interfere with any financing, acquisition, corporate reorganization or
other material transaction involving the Company that prior to such
request the Board of Directors of the Company had agreed by resolution
to pursue.
(4) If, pursuant to a request for Demand Registration, the
Company delivers to the Holder or the Holders' Representative, as
applicable, an opinion of counsel to the effect that sales of
Registrable Securities thereunder might cause the Company to lose a
material amount of net operating losses or other tax carry forwards,
the Company may postpone the filing of the registration statement
otherwise required to be filed by it pursuant hereto, but only to the
extent required to protect such carry forwards, and only if it is first
determined that such protection cannot be effected by reducing the
number of securities being registered.
2.3 HOLDBACK AGREEMENTS; REQUIREMENTS OF THE HOLDER.
(a) RESTRICTIONS ON PUBLIC SALE BY THE HOLDER. To the extent not
inconsistent with applicable law, the Holder agrees that, during the Restriction
Period, as defined below, it will not
Page 6 of 19
<PAGE> 9
effect any public sale or distribution of the issue being registered or a
similar security of the Company or any securities convertible into or
exchangeable or exercisable for such securities, during the 14 days prior to,
and during the 90-day period beginning on, the effective date of such
registration statement (the "Restriction Period") (except as part of such
registration), but only if and to the extent requested in writing (with
reasonable prior notice) by the managing underwriter or underwriters in the case
of an underwritten public offering by the Company of securities similar to the
Registrable Securities.
(b) RESTRICTIONS PUBLIC SALE BY THE COMPANY. The Company agrees not to
effect any public sale or distribution of any securities being registered, or
any securities similar to those being registered, or any securities convertible
into or exchangeable or exercisable for such securities, during the 14 days
prior to, and during the 90-day period beginning on, the effective date of any
registration statement in which the Holder is participating (except (i) pursuant
to such registration statement, or (ii) pursuant to sales to employee stock
purchase or option plans which are exempt from the registration requirements of
the 1933 Act, or (iii) pursuant to any other stock option or similar agreements
which require the Company to issue securities in accordance with the terms of
such agreements, which issuances set forth in clauses (ii) and (iii) preceding
are exempt from the registration requirements of the 1933 Act).
(c) COOPERATION BY HOLDER. The offering of Registrable Securities by
the Holder shall comply in all respects with the applicable terms, provisions
and requirements set forth in this Agreement, and the Holder shall timely
provide the Company with all information and materials required to be included
in a registration statement that (a) relate to the offering, (b) are in
possession of the Holder, and (c) relate to the Holder, and to take all such
action as may be reasonably required in order not to delay the registration and
offering of the securities by the Company. The Company shall have no obligation
to include in such registration statement shares of the Holder if the Holder has
failed to furnish such information or materials and if, in the written opinion
of counsel to the Company, such information and materials are required in order
for the registration statement to be in compliance with the 1933 Act.
2.4 REGISTRATION PROCEDURES. Whenever any Registrable Securities are to
be registered pursuant to Sections 2.1 or 2.2, the Company will use reasonable
diligence to effect the registration of such Registrable Securities in
accordance with the intended method of disposition thereof as quickly as
practicable and in accordance with the provisions of Section 2. In connection
with any Piggyback Registration or Demand Registration, the Company shall as
expeditiously as possible:
(a) prepare and file with the Commission a registration statement that
includes the Registrable Securities requested to be included therein in
accordance with Section 2.1 or 2.2 and use reasonable diligence to cause such
registration statement to become effective; provided, however, that at least ten
Business Days before filing a registration statement or prospectus or any
amendment or supplement thereto, including documents incorporated by reference
therein, the Company will furnish to the Holder, and the underwriters, if any,
draft copies of all such documents proposed to be filed, which documents will be
subject to the review of the Holder and such underwriters, and the Company will
not file any registration statement or prospectus or amendment or supplement
thereto
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<PAGE> 10
(including such documents incorporated by reference) to which the Holder or the
underwriters with respect to such Registrable Securities, if any, shall
reasonably object; and provided further, however, that if the Company, in the
case of a Piggyback Registration, despite the reasonable objection of the Holder
desires to proceed with the registration of its shares, the Holder may withdraw
the Registrable Securities from being included in such offering, using its
good-faith efforts to minimize delay caused by such withdrawal, and the Company
may then, notwithstanding anything to the contrary in the immediately preceding
proviso, proceed with such offering; the Company and the Holder acknowledge that
such withdrawal by the Holder will delay such offering for as much time as is
necessary to amend such registration statement or prospectus to reflect the
withdrawal of such Registrable Securities from such offering;
(b) prepare and file with the Commission such amendments and
post-effective amendments to the registration statement as may be necessary to
keep the registration statement effective for a period of twenty-four months (or
such shorter period which will terminate when all Registrable Securities covered
by such registration statement have been sold or withdrawn, but not prior to the
expiration of the 90-day period referred to in Section 4(3) of the 1933 Act and
Rule 174 thereunder, if applicable); cause the prospectus to be supplemented by
any required prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the 1933 Act; and comply with the provisions of the 1933 Act
applicable to it with respect to the disposition of all securities covered by
such registration statement during the applicable period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
registration statement or supplement to the prospectus; the Company shall not be
deemed to have complied with its obligations hereunder to keep a registration
statement effective during the applicable period if it voluntarily takes any
action that would result in the prevention of the Holder from selling such
Registrable Securities during that period unless such action is required under
applicable law;
(c) furnish to the Holder and the underwriter or underwriters, if any,
without charge, such reasonable number of conformed copies of the registration
statement and any post-effective amendment thereto and such reasonable number of
copies of the prospectus (including each preliminary prospectus) and any
amendments or supplements thereto, and any documents incorporated by reference
therein, as the Holder or underwriter may request in order to facilitate the
disposition of the Registrable Securities being sold by the Holder (it being
understood that the Company consents to the use of the prospectus and any
amendment or supplement thereto by the Holder and the underwriter or
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by the prospectus or any amendment or supplement
thereto);
(d) notify the Holder at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, when the Company becomes aware of
the happening of any event as a result of which the prospectus included in such
registration statement (as then in effect) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and, as promptly as practicable thereafter, prepare and file with the
Commission and furnish a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such
Page 8 of 19
<PAGE> 11
Registrable Securities, such prospectus will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(e) use reasonable diligence to cause all Registrable Securities
included in such registration statement to be listed, by the date of the first
sale of Registrable Securities pursuant to such registration statement, on each
securities exchange (including, for this purpose, NASDAQ) on which the Common
Stock of the Company is then listed or proposed to be listed, if any;
(f) make generally available to its security holders an earnings
statement satisfying the provisions of Section 11(a) of the 1933 Act no later
than 45 days after the end of the 12-month period beginning with the first day
of the Company's first fiscal quarter commencing after the effective date of the
registration statement, which earnings statement shall cover said 12-month
period, which requirement will be deemed to be satisfied if the Company timely
files complete and accurate information on such forms and reports as the Company
may be required to file under the Exchange Act and otherwise complies with Rule
158 under the 1933 Act as soon as feasible;
(g) notify the Holder of any stop order issued or threatened by the
Commission in connection therewith and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered, and make every
reasonable effort to obtain the withdrawal of any order suspending the
effectiveness of the registration statement at the earliest possible moment;
(h) if requested by the managing underwriter or underwriters, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or underwriters or the Holder reasonably
requests to be included therein, including, without limitation, the purchase
price being paid therefor by such underwriter or underwriters and any other
terms of the underwritten offering of such Registrable Securities (excluding,
however, information with respect to the number of Registrable Securities being
sold to such underwriter or underwriters by the Holder), and promptly make all
required filings of such prospectus supplement or post-effective amendment;
(i) as promptly as practicable after filing with the Commission of any
document which is incorporated by reference into a registration statement,
deliver to the Holder as many copies of that document as may be reasonably
requested by the Holder;
(j) on or prior to the date on which the registration statement is
declared effective, use reasonable diligence to register or qualify, and
cooperate with the Holder the underwriter or underwriters, if any, and their
counsel, in connection with the registration or qualification of the Registrable
Securities covered by the registration statement for offer and sale under the
securities or blue sky laws of each state and other jurisdiction of the United
States as the Holder or underwriter reasonably requests in writing, to use
reasonable diligence to keep each such registration or qualification effective,
including through new filings, or amendments or renewals, during the period such
registration statement is required to be kept effective and to do any and all
other acts or things
Page 9 of 19
<PAGE> 12
necessary or advisable to enable the disposition in all such jurisdictions of
the Registrable Securities covered by the applicable registration statement;
provided that the Company will not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action which would subject it to general service of process in any such
jurisdiction where it is not then so subject; and provided, further, however,
that while it is the present intention of the Holder to cooperate with the
Company to keep the costs of compliance with state blue sky laws to a minimum,
the Holder shall have the right to require compliance by the Company with the
blue sky laws of as many states as the managing underwriter deems reasonably
necessary in its good faith judgment to realize the maximum possible value for
the Registrable Securities included in such registration statement;
(k) cooperate with the Holder and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing securities to be sold under the registration statement
and enable such securities to be in such denominations and registered in such
names as the managing underwriter or underwriters, if any, may request, subject
to the underwriters' obligation to return any certificates representing
securities not sold;
(l) use reasonable diligence to cause the Registrable Securities
covered by the registration statement to be registered with or approved by such
other governmental agencies or authorities within the United States as may be
necessary to enable the seller or sellers thereof or the underwriter or
underwriters, if any, to consummate the disposition of such securities;
(m) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other reasonable actions as the
Holder or the underwriters retained by the Holder participating in an
underwritten public offering, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities;
(n) make available for inspection by the Holder any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent retained by any such seller or
underwriter (collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be necessary to enable them to exercise their due diligence
responsibility; and cause the Company's officers, directors and employees
to-make available for inspection and/or copying all Records reasonably requested
by any such Inspector in connection with such registration statement; provided
however, that in the case of a second Demand Registration (within the meaning of
Section 2.2(b)), the Holder shall bear the out-of-pocket costs of copying such
documents as are requested by any such Inspector in accordance with this Section
2.4(n); and
(o) use reasonable diligence to obtain a "cold comfort" letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by cold comfort letters covering
registration statements similar to the registration statement at issue as the
Holder reasonably requests.
Page 10 of 19
<PAGE> 13
The Holder, upon receipt of any notice from the Company of the
occurrence of any event of the kind described in subsection (d) of this Section
2.4, will forthwith discontinue disposition of the Registrable Securities until
the Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by subsection (d) of this Section 2.4 and copies of any additional
or supplemental filings which are incorporated by reference in the prospectus,
or until it is advised in writing (the "Advice") by the Company that the use of
the prospectus may be resumed. If so directed by the Company, the Holder shall
deliver to the Company (at the Company's expense) all copies in its possession
or control, other than permanent file copies then in the Holder's possession, of
the prospectus covering such Registrable Securities. In the event the Company
shall give any such notice, the time periods mentioned in subsection (b) of this
Section 2.4 shall be extended by the number of days during the period from and
including the date of the giving of such notice to and including the date when
each seller of Registrable Securities covered by such registration statement
shall have received the copies of the supplemented or amended prospectus
contemplated by subsection (d) of this Section 2.4 hereof or the Advice.
If such registration statement refers to the Holder by name or
otherwise as the holder of any securities of the Company then the Holder shall
have the right to require (i) the insertion therein of language, in form and
substance satisfactory to the Holder to the effect that the holding by such
Holder of such securities is not to be construed as a recommendation of such
Holder of the investment quality of the Company's securities covered thereby and
that such holding does not imply that the Holder will assist in meeting any
future financial requirements of the Company, or (ii) in the event that such
reference to such Holder by name or otherwise is not required by the Securities
Act or any similar federal statute then in force, the deletion of the reference
to such Holder.
2.5 REGISTRATION EXPENSES. Except as otherwise provided in Section
2.2(b), all expenses incident to the Company's performance of or compliance with
this Agreement, including without limitation, all Commission and securities
exchange or National Association of Securities Dealers, Inc. registration and
filing fees, all fees and expenses (other than the pro rata portion of filing
fees that are required by state law with respect to the securities to be sold)
relating to compliance with securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), all printing expenses, messenger and delivery expenses,
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), fees and
expenses incurred in connection with the listing of the securities to be
registered on securities exchanges, fees and disbursements of counsel for the
Company and its independent certified public accountants (including the expenses
required for "cold comfort" letters required by or incident to such
performance), and fees and expenses of any special experts retained by the
Company in connection with such registration (but not including any underwriting
fees, discounts or commissions directly attributable to the sale of Registrable
Securities) (all such expenses being herein called "Registration Expenses"),
will be home by the Company; provided, however that, the Company shall not be
obligated to pay (i) the fees and disbursements of any counsel for the Holder or
liability insurance (if the Company elects to obtain such insurance) for the
Holder, or (ii) any out-of-pocket expenses of the Holder, which fees,
disbursements and expenses described in clauses (i) and (ii) preceding shall be
borne by the Holder, and provided that the Holder shall bear its pro rata
portion of any underwriting fees, discounts or
Page 11 of 19
<PAGE> 14
commissions directly attributable to any sale of Registable Securities in which
the Holder participates.
2.6 INDEMNIFICATION; CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless each Holder of Registrable Securities, its officers, directors,
partners and each Person who controls such Holder (within the meaning of the
1933 Act), and any Agent (as hereinafter defined) or investment advisor thereof
against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation, and attorneys fees and expenses as further
provided in Section 2.6(c)) (collectively, "Liabilities") arising out of or
based upon any untrue or alleged untrue statement of material fact contained in
any registration statement, any amendment or supplement thereto, or any
prospectus or preliminary prospectus contained therein, 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, except insofar as
any such Liabilities arise out of or are based upon any untrue statement or
omission based upon information with respect to such indemnified Person
furnished in writing to the Company by such indemnified Person expressly for use
therein. In connection with an underwritten offering, the Company will indemnify
the underwriters thereof, their officers and directors and each Person who
controls such underwriters (within the meaning of the 1933 Act) to the same
extent as provided above with respect to the indemnification of the Holders of
Registrable Securities or to such other extent as the Company and such
underwriters may agree. For purposes of this Section 2.6(a), an "Agent" of a
Holder of Registrable Securities is any Person acting for or on behalf of such
Holder with respect to the holding or sale of such Registrable Securities.
(b) INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. In connection
with any registration statement in which the Holder is participating, the Holder
will furnish to the Company in writing such information with respect to the name
and address of the Holder and the amount of Registrable Securities held by the
Holder and such other information as the Company shall reasonably request for
use in connection with any such registration statement or prospectus, and agrees
to indemnify, to the extent permitted by law, the Company, its directors and
officers and each Person who controls the Company (within the meaning of the
1933 Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue statement of a material fact or any omission of a
material fact required to be stated in the registration statement or prospectus
or any amendment thereof or supplement thereto or necessary to make the
statements therein not misleading! to the extent. but only to the extent, that
such untrue statement or omission is based upon any information with respect to
the Holder so furnished in writing by the Holder specifically for inclusion in
any prospectus or registration statement. In connection with an underwritten
offering, the Holder participating in such offering will indemnify the
underwriters thereof, their officers and directors and each Person who controls
such underwriters (within the meaning of the 1933 Act) to the same extent as
provided in the immediately preceding sentence with respect to indemnification
of the Company. In no event shall the liability of the Holder hereunder be
greater in amount than the dollar amount of the proceeds received by the Holder
upon the sale of the Registrable Securities giving rise to such indemnification
obligation.
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<PAGE> 15
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled to
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such Person of any written notice of the
commencement of any action, suit, proceeding or investigation or threat thereof
made in writing for which such Person may claim indemnification or contribution
pursuant to this Agreement and, unless in the written opinion of counsel for
such indemnified party a conflict of interest may exist between such indemnified
party and the indemnifying party with respect to such claim, permit the
indemnifying party to assume, at the sole cost and expense of the indemnifying
party, the defense of such claim with counsel reasonably satisfactory to such
indemnified party. Whether or not such defense is assumed by the indemnifying
party, the indemnifying party will not be subject to any liability for any
settlement made without its consent. No indemnifying party will 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 of such claim or
litigation. If the indemnifying party is not entitled to, or elects not to,
assume the defense of a claim, the indemnified party shall be entitled to hire
counsel reasonably satisfactory to it, the fees and expenses of which shall be
borne by, in their entirety, the indemnifying party; provided, however, that the
indemnifying party shall not be obligated to pay the fees and expenses of more
than one counsel with respect to such claim, unless in the opinion of counsel
for any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels.
(d) CONTRIBUTION. If the indemnification provided for in this Section
2.6 from the indemnifying party is unavailable to an indemnified party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the 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, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 2.6(c), any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 2.6(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 2.6(d), the Holder shall not be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable
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<PAGE> 16
Securities of the Holder were offered to the public exceeds the amount of any
damages which the Holder has otherwise been required to pay by reason of such
untrue statement or omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(0 of the 1933 Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
The obligations of the Company pursuant to this Section 2.6 shall be
further subject to such additional express agreements of the Company as may be
required to facilitate an underwritten offering, provided that no such agreement
shall in any way limit the rights of the Holder under this Agreement, or create
additional obligations of the Holder not set forth herein, except as otherwise
expressly agreed in writing by the Holder.
2.7 PARTICIPATION IN UNDERWRITING REGISTRATIONS. Holder may not
participate in any underwritten registration hereunder unless the Holder (a)
agrees to sell its securities on the terms of and on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements (which shall be (i) the Company in the case of an offering of
securities by the Company and (ii) the Holder in the case of a Demand
Registration) and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
2.8 RULE 144; INFORMATION. The Company covenants that, upon any
registration statement covering Company securities becoming effective, it will
file the reports required to be filed by it under the 1933 Act and the Exchange
Act and the rules and regulations adopted by the Commission thereunder (or, if
the Company is not required to file such reports, it will, upon the request of
the Holder make publicly available other nonconfidential information as is
necessary to permit sales under Rule 144 under the 1933 Act), and it will take
such other action as the Holder may reasonably request, all to the extent
required from time to time to enable the Holder to sell Registrable Securities
without registration under the 1933 Act within the limitation of the exemptions
provided by (a) Rule 144 under the 1933 Act, as such Rule may be amended from
time to time, or (b) any similar rule or regulation hereafter adopted by the
Commission; provided further that if the Company is not required to file reports
under the 1933 Act and the Exchange Act and the rules and regulations adopted by
the Commission thereunder, the Company shall, upon the request of the Holder,
provide the Holder audited financial statements and access to the books and
records of the Company and, if requested by the Holder sufficient information to
enable the Holder to comply with Rule 144 or Rule 144A under the 1933 Act. Upon
the request of the Holder, the Company will deliver to the Holder a written
statement as to whether it has complied with such requirements.
SECTION 3. OTHER REGISTRATION RIGHTS.
3.1 FUTURE RIGHTS. From the date of this Agreement until the earlier to
occur of the sixth anniversary hereof or the date that all Registrable
Securities have been registered under the 1933 Act, the Company will not grant
to any Person (excluding the Holder) any registration rights with respect to any
securities of the Company other than registration rights ("new rights") that are
granted in
Page 14 of 19
<PAGE> 17
connection with the investment in the Company by such grantee of at least
$1,000,000. Such new rights must (i) be subordinate to and of a lesser priority
than the registration rights granted by the Company under this Agreement, (ii)
be approved in writing by the Holder, and (iii) not be inconsistent with the
terms of this Agreement. Additionally, new rights may not be granted without
expressly providing that, with respect to demand registration rights granted to
such other Persons, the Holder have a piggyback right upon the exercise of such
new rights and shall be included in any related registration statement on the
same terms and conditions as the holders of the new rights, subject to possible
reduction at the initiative of the managing underwriter or underwriters, on
terms substantially equivalent to those set forth in Section 2.1. The Company
may grant registration rights that permit any Person the right to piggyback or
may itself exercise the right to piggyback on any Demand Registration; provided
that if the managing underwriter or underwriters of such offering delivers an
opinion to the Holder that the total amount of securities which they and the
holders of such piggyback rights intend to include in any offering is so large
as to materially and adversely affect the success of such offering (including
the price at which such securities can be sold), then the amount or kind of
securities to be offered for the account of holders of such piggyback rights, or
the Company if it is exercising piggyback rights, will be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by the managing underwriter prior to any
reduction in the amount of Registrable Securities to be included; and further
provided that if such offering is not underwritten, then any such piggyback
shall only be exercised with the consent of the Holder.
3.2 REPRESENTATION AND WARRANT. The Company hereby represents and
warrants to SWCC that on or prior to the date hereof, (a) the Company has not
granted registration rights to any Person except for the registration rights
granted under this Agreement, and (b) no consent, approval, authorization or
waiver of any Person is required to permit the Company to (i) execute or deliver
this Agreement or (ii) perform this Agreement in accordance with its terms other
than with respect to registration under the 1933 Act and comparable
registrations with state securities commissions.
SECTION 4. MISCELLANEOUS.
4.1 RECAPITALIZATION, EXCHANGES, ETC. The provisions of this Agreement
shall apply, to the full extent set forth herein with respect to the Registrable
Securities, to any and all shares of equity capital of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in exchange for, or in
substitution of the Registrable Securities, in each case as the amounts of such
securities outstanding are appropriately adjusted for any equity dividends,
splits, reverse splits, combinations, recapitalization and the like occurring
after the date of this Agreement.
4.2 OPINIONS. When any legal opinion is required to be delivered
hereunder, such opinion may contain such qualifications as may be customary or
otherwise appropriate for legal opinions in similar circumstances.
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<PAGE> 18
4.3 NOTICES. (a) All communications under this Agreement shall be in
writing to the following addresses:
(i) If to Company, to:
ACR Group, Inc.
3200 Wilcrest, #440
Houston, Texas 77042
Attention: Tony Maresca, Senior Vice
President and Chief Financial
Officer
Facsimile No.: (713) 780-4067
(ii) If to the Holder, to:
Southwest/Catalyst Capital, Ltd.
Three Riverway, Suite 770
Houston, Texas 77056
Attention: Ron Nixon
Facsimile No.: (713) 623-0473
or to such other address as any party may furnish to the others in writing in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
(b) Any communication so addressed and mailed by first class registered
or certified mail, postage prepaid, shall be deemed to be received on the third
Business Day after so mailed, and if delivered by personal delivery (including
by courier) or facsimile to such address, upon delivery during normal business
hours.
4.4 APPLICABLE LAW. This contract is entered into under, and shall be
governed for all purposes by, the laws of the State of Texas.
4.5 AMENDMENT AND WAIVER. This Agreement may be amended, and the
provisions hereof may be waived, only by a written instrument signed by the
Holder and the Company. No failure by either party hereto at any time to give
notice of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
4.6 REMEDY FOR BREACH OF CONTRACT. The parties agree that in the event
there is any breach or asserted breach of the terms, covenants or conditions of
this Agreement, the remedy of the parties hereto shall be in law and in equity
and injunctive relief shall lie for the enforcement of or relief from any
provisions of this Agreement. If any remedy or relief is sought and obtained by
any party against one of the other parties pursuant to this Section 4.6, the
other party shall, in addition to the remedy of relief so obtained, be liable to
the party seeking such remedy or relief for the
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<PAGE> 19
reasonable expenses incurred by such party in successfully obtaining such remedy
or relief, including the fees and expenses of such party's counsel.
4.7 SEVERABILITY. It is a desire and intent of the parties that the
terms, provisions, covenants and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant or remedy of this Agreement or the application thereof to any Person or
circumstances shall, to any extent, be construed to be invalid or unenforceable
in whole or in part, then such term, provision, covenant or remedy shall be
construed in a manner so as to permit its enforceability under the applicable
law to the fullest extent permitted by law. In any case, the remaining
provisions of this Agreement or the application thereof to any Person or
circumstances other than those to which they have been held invalid or
unenforceable, shall remain in full force and effect.
4.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
4.9 HEADINGS. The section and paragraph headings have been inserted
for purposes of convenience and shall not be used for interpretive purposes.
4.10 BINDING EFFECT. Unless otherwise provided herein, the provisions
of this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
permitted assigns, and is not intended to confer upon any other Person any right
or remedies hereunder, provided, however, that a transferee of Holder shall be
deemed to be a Holder for purposes of obtaining the benefits or enforcing the
rights of a Holder.
4.11 ENTIRE AGREEMENT. This Agreement, together with the other
agreements referenced herein, constitutes the entire agreement and supersedes
all prior agreements, understandings, both written and oral, among the parties
with respect to the subject matter hereof.
4.12 MULTIPLE HOLDERS. In the event that more than one Person shall
constitute the "Holder" under this Agreement each such Person shall have the
rights and duties of the Holder hereunder with respect to its Registerable
Securities but not those of any other such Persons. In that event, however, SWCC
(or if SWCC no longer is a Person constituting the Holder, such other Person as
all of the Persons constituting the Holder shall designate with the Company's
consent) shall act as representative of all such Persons constituting the Holder
(the "Holders' Representative") for the purposes of giving and receiving
consents, notices, amendments, and documents and exercising the rights of the
Holder. Accordingly, if more than one Person shall constitute the Holder (a) any
amendment signed by the Holders' Representative shall be conclusively deemed, as
between the parties hereto, as having been signed by the Holder, (b) any consent
required or permitted to be obtained from the Holder shall be obtained only from
the Holders' Representative, and (c) any notice
Page 17 of 19
<PAGE> 20
required to be given or document delivered pursuant to this Agreement shall be
deemed duly given or delivered only if given to the Holders' Representative in
accordance with Section 4.3. In no event, however, shall the Holder's
Representative or any other Person constituting the Holder be liable for
information supplied by a Person constituting the Holder, and that Person and
the Company shall deal directly with each other with respect to matters in
Section 2.6.
Page 18 of 19
<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ACR GROUP, INC.
By:
-------------------------------
Alex Trevino, Jr., President
SOUTHWEST/CATALYST CAPITAL, LTD.
By: SWC Management, Inc.,
its general partner
By:
---------------------------
Ron Nixon, Vice President
Page 19 of 19
<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, 1998. All of the companies are wholly-owned.
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
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
Contractors Heating & Supply, Inc. Texas
</TABLE>
<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.
and the Registration Statement (Form S-3 No. 333-42701) pertaining to the
registration of 2,411,667 shares of common stock of ACR Group, Inc., of our
report dated May 15, 1998, with respect to the consolidated financial statements
and schedule of ACR Group, Inc. included in its Annual Report (Form 10-K) for
the year ended February 28, 1998, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Houston, Texas
May 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 90,000
<SECURITIES> 0
<RECEIVABLES> 12,651,251
<ALLOWANCES> 762,709
<INVENTORY> 16,962,351
<CURRENT-ASSETS> 30,039,766
<PP&E> 6,383,684
<DEPRECIATION> 2,669,857
<TOTAL-ASSETS> 41,107,821
<CURRENT-LIABILITIES> 16,492,771
<BONDS> 0
0
0
<COMMON> 106,340
<OTHER-SE> 7,854,080
<TOTAL-LIABILITY-AND-EQUITY> 41,107,821
<SALES> 96,164,148
<TOTAL-REVENUES> 96,164,148
<CGS> 76,606,033
<TOTAL-COSTS> 76,606,033
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 832,515
<INTEREST-EXPENSE> 1,686,830
<INCOME-PRETAX> 570,485
<INCOME-TAX> (332,881)
<INCOME-CONTINUING> 903,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 903,366
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
