<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
REGISTRATION NO. 333-24043
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NEW PAMECO GEORGIA CORPORATION
(TO BE KNOWN AS PAMECO CORPORATION UPON EFFECTIVENESS)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 5075 51-0287654
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION
ORGANIZATION) NUMBER)
1000 CENTER PLACE THEODORE R. KALLGREN
NORCROSS, GEORGIA 30093 CHIEF FINANCIAL OFFICER
(770) 798-0700 1000 CENTER PLACE
(ADDRESS, INCLUDING ZIP CODE, AND NORCROSS, GEORGIA 30093
TELEPHONE NUMBER, (770) 798-0700
INCLUDING AREA CODE, OF REGISTRANT'S (NAME, ADDRESS, INCLUDING ZIP
PRINCIPAL EXECUTIVE OFFICES) CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR
SERVICE)
---------------
COPIES TO:
DAVID A. STOCKTON, ESQ. MARK C. SMITH, ESQ.
KILPATRICK STOCKTON LLP SKADDEN, ARPS, SLATE, MEAGHER &
1100 PEACHTREE STREET FLOM LLP
ATLANTA, GEORGIA 30309 919 THIRD AVENUE
(404) 815-6500 NEW YORK, NEW YORK 10022
(212) 735-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities on this Form are being offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
, 1997
3,578,644 SHARES
[LOGO OF PEMECO CORP APPEARS HERE]
CLASS A COMMON STOCK
Of the 3,578,644 shares of Class A Common Stock, par value $0.01 per share
(the "Class A Common Stock"), of Pameco Corporation ("Pameco" or the "Company")
offered hereby (the "Offering"), 3,000,000 shares are being sold by Pameco and
578,644 shares are being sold by shareholders of the Company (the "Selling
Shareholders"). The Class A Common Stock entitles its holders to one vote per
share, whereas the Class B Common Stock, par value $0.01 per share (the "Class
B Common Stock" and together with the Class A Common Stock, the "Common
Stock"), generally entitles its holders to ten votes per share. The holders of
Class A Common Stock, voting as a separate class, are entitled to elect two of
the Company's directors. See "Description of Capital Stock." After consummation
of the Offering, a group of investment vehicles (the "Investor Group") managed
by Three Cities Research, Inc., a private investment firm ("TCR"), will have
approximately 87.0% of the combined voting power (on a fully diluted basis)
with respect to substantially all matters submitted for the vote of all
shareholders. Substantially all of the net proceeds to the Company from the
Offering will be used to repay outstanding indebtedness. The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholders
pursuant to the Offering. See "Principal and Selling Shareholders."
Prior to the Offering, there has been no public market for the Class A Common
Stock. It is currently estimated that the initial public offering price of the
Class A Common Stock offered pursuant to the Offering will be between $13.00
and $15.00 per share. For information relating to the factors to be considered
in determining the initial offering price to the public of the Class A Common
Stock, see "Underwriting."
The Class A Common Stock has been approved for listing on the New York Stock
Exchange subject to notice of issuance under the symbol "PCN."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
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<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
Total(3)............... $ $ $ $
</TABLE>
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses estimated at $ , which will be paid by the
Company.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to 536,797 additional shares of
Class A Common Stock at the Price to the Public less Underwriting Discounts
and Commissions, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions, Proceeds to the Company and Proceeds to the Selling
Shareholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters
against payment therefor and subject to various prior conditions, including
their right to reject orders in whole or in part. It is expected that delivery
of share certificates representing the Class A Common Stock will be made in New
York, New York on or about , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.
SCHRODER WERTHEIM & CO.
<PAGE>
[MAP OF THE CONTINENTAL UNITED STATES SHOWING THE LOCATION
OF EACH BRANCH AND DISTRIBUTION CENTER TO BE INCLUDED]
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF CLASS A COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless the context otherwise requires, references herein to the
"Company" or "Pameco" prior to the consummation of the Reincorporation Merger
(as defined herein) mean Pameco Holdings, Inc., a Delaware corporation, and its
subsidiaries, and references to the "Company" or "Pameco" after consummation of
the Reincorporation Merger mean New Pameco Georgia Corporation, a Georgia
corporation, and its subsidiary, whose name will be changed to Pameco
Corporation upon consummation of the Reincorporation Merger. See "--Company
History and Recent Acquisitions." All numbers of shares, per share amounts and
related information in this Prospectus reflect a 1.25-for-one split of the
Common Stock effected as part of the Reincorporation Merger, which will be
effected prior to the Offering. See "Description of Capital Stock." References
herein to fiscal year 1997 mean the fiscal year ended February 28, 1997 and to
fiscal year 1996 mean the fiscal year ended February 29, 1996. Unless otherwise
indicated, the information contained in this Prospectus assumes no exercise of
the Underwriters' over-allotment option.
THE COMPANY
Pameco is one of the largest distributors of heating, ventilation and air
conditioning ("HVAC") systems and equipment and refrigeration products in the
United States, with predecessor corporations dating back to 1931. The Company
stocks more than 65,000 stock keeping units ("SKUs") to service more than
45,000 customers through a national network of 294 branches in 44 states and
Guam located in 76 of the top 100 standard metropolitan statistical areas
("SMSAs") in the country. The Company's products include a complete range of
central air conditioners, heat pumps, furnaces and parts and supplies for the
residential market, and condensing units, compressors, evaporators, valves,
walk-in coolers and ice machines for the commercial market. In fiscal 1997, the
Company's HVAC business generated approximately 57.0% of its revenues, while
the refrigeration business generated the balance. In fiscal 1997, Pameco
derived over 80.0% of its revenues from the repair and replacement market,
which is higher margin and less cyclical than the new construction market due
to end-users' needs for immediate service and expert technical advice. The new
construction market generated the balance of Pameco's revenues. Management
believes that Pameco is one of a small number of companies in the United States
which offers a complete line of HVAC and refrigeration products on a
significant scale on a nationwide basis.
Pameco attributes its leadership position in the HVAC and refrigeration
distribution industries primarily to its operating philosophy. The Company
emphasizes personalized customer service and convenient "one-stop" shopping to
meet each customer's total needs at the local and national level. The Company's
technical service representatives, who provide customers with technical advice
in diagnosing problems and recommending solutions, are an essential element of
the Company's customer service. Pameco operates under a centralized management
structure and offers substantial incentive compensation to its executive
officers and division and branch managers. Additionally, the Company believes
that its size, its financial resources and its position as a national
distributor of HVAC and refrigeration products allow it to provide superior
customer service by offering immediate access to a complete product line of
equipment, parts and supplies through its 294 branches and six regional
distribution centers.
The Company's strategic objective is to continue to grow profitably in both
existing and new markets through the acquisition of branches and the opening of
new branches, as well as through increasing sales and profitability at existing
branches. The Company began an active acquisition program in 1996 to capitalize
on consolidation opportunities presented by the substantial size and highly
fragmented ownership structure of the HVAC and refrigeration markets.
Management believes Pameco is well-positioned to take advantage of this
fragmentation given the Company's breadth of product offerings, its national
presence and its proven ability to
3
<PAGE>
acquire and integrate new branches, as demonstrated by its recent acquisitions.
The Company's acquisition strategy is to acquire profitable distribution
businesses with well-developed market positions and desirable supplier
franchises. The Company has focused and will continue to focus principally on
acquisitions in geographic areas not currently served by the Company, with the
goal of achieving greater geographic diversification and adding product lines,
customers and employees ("associates"). Pameco will also pursue opportunities
to strengthen its position in existing markets by acquiring new branches within
existing geographic markets.
For the fiscal year ended February 29, 1996, the Company's sales were $334.5
million compared to $378.7 million for the fiscal year ended February 28, 1997.
Same store sales increased 8.0% during this period. On a pro forma basis,
assuming the completion of the acquisition of 52 branches from Sid Harvey
Industries, Inc. ("Sid Harvey") and six branches from Chase Supply Company of
Chicago ("Chase") as of March 1, 1995, sales would have been $394.5 million and
$421.0 million for fiscal years ended February 29, 1996 and February 28, 1997,
respectively. Net income for the fiscal year ended February 29, 1996 was $5.5
million compared to $10.7 million for the fiscal year ended February 28, 1997.
On a pro forma basis, assuming the completion of the Sid Harvey and Chase
acquisitions as of March 1, 1995, net income would have been $5.4 million and
$10.6 million for the fiscal years ended February 29, 1996 and February 28,
1997, respectively.
THE INDUSTRY
Based upon an industry report, management estimates that sales in the
residential and light commercial heating and cooling equipment and commercial
refrigeration markets (excluding product markets in which the Company does not
compete) totaled approximately $8.1 billion and $2.8 billion, respectively, in
1996. The combined $10.9 billion industry includes equipment, parts and
supplies distributed by wholesalers and by original equipment manufacturers'
("OEMs") captive distribution arms, but excludes HVAC systems sold for use in
large commercial projects and refrigeration products sold in the residential
market. Companies engaging in the HVAC and refrigeration repair and replacement
markets sell their products primarily through local branches for their
customers' convenience and timely access to products. Management estimates that
there are 8,100 HVAC and refrigeration distributors in the United States
operating from approximately 11,000 locations nationwide. Management believes
that a significant percentage of these distributors are small, owner-operated
businesses operating in single geographic areas and providing a more limited
range of products and services. Based upon the industry report and the
Company's fiscal 1997 revenues, management estimates that Pameco's cumulative
U.S. market share in its industry sectors is between three and four percent and
that no independent distributor has a significantly greater share of this
combined market on a nationwide basis.
Management believes that the fragmentation of its market stems from several
factors. First, manufacturers have historically limited their distributors'
distribution rights, including those granted to Pameco, to selected geographic
areas. For example, until recently, no major HVAC or refrigeration product
manufacturer had allowed Pameco to carry its product lines throughout the
United States. Second, customers prefer doing business at branch locations
within a 20-minute commute (five to 10 miles) of their job sites. This
preference limits the geographic area that a particular branch can support.
Finally, distributors typically do not stock all HVAC and refrigeration
products at the branch level; instead, each maintains an inventory of the most
frequently purchased SKUs. If a particular distributor (such as Pameco) does
not stock an infrequently purchased item required immediately by a particular
customer, that customer may conduct business with one of the distributor's
competitors. See "--Distribution Centers and Branch Operations."
Given the fragmentation of the market, management believes that the HVAC and
refrigeration distribution industry is well-positioned for consolidation. In
particular, management believes that many of the smaller distributors in its
industry are finding it increasingly difficult to compete in the current market
because they
4
<PAGE>
generally lack the financial resources of larger entities and thus are unable
to offer broad product lines and multiple brands and may not possess
sophisticated inventory management and control systems necessary to operate
multiple branches effectively or the ability to invest significant resources in
the information technology necessary to improve inventory flow. In addition to
the trend toward consolidation, management believes other important trends
within the industry include: (i) an increased presence of large customer buying
groups, forcing a competitive bidding process, while creating opportunities to
sell to new and large national accounts; (ii) the increased importance of
immediate availability of products; (iii) the attempt by many of the smaller
distributors to identify exit strategies for their business and (iv) the
proliferation of products and parts.
BUSINESS STRATEGY
The Company has invested considerable time and resources building its
national reputation and leveraging the goodwill of local branches that the
Company has developed or acquired. The Company has recently hired a new Chief
Executive Officer and four highly qualified senior managers in sales,
operations, logistics and management information systems to assist in the
implementation of the Company's operating strategy. The Company is pursuing the
following strategy to enhance growth and increase profitability:
Expansion by acquisition. The Company launched a targeted acquisition
strategy in 1996 as a consolidator in the HVAC and refrigeration distribution
industries. In the past 12 months, the Company has acquired 60 branches in 11
states, increasing its total number of branches by over 20.0%. Pameco is able
to maximize its return on investment in new branches and obtain incremental
revenues and operating income with minimal incremental administrative expenses,
due to economies of scale made possible by the Company's prior investment in
its sales, operations, logistics and management information systems
infrastructure. Further, by geographically diversifying its sources of revenue
management believes the Company is less susceptible to economic slowdowns or
adverse weather conditions which may occur in particular regions of the
country.
Emphasis on "one-stop" shopping and immediate product and service
availability. Management believes that Pameco provides added value to its
customers by providing superior customer service and immediate access to a
complete line of industry-recognized brand names and private label equipment,
parts and supplies from numerous manufacturers through its branches and
distribution centers. The Company stocks over 65,000 SKUs at its branches and
distribution centers and offers customers access to over two million SKUs. In
order to provide customers immediate access to products, the Company stocks
inventory representing over 75.0% of its sales at its branches. Pameco believes
its ability to provide immediate access to a wide range of products,
particularly in the refrigeration business, where equipment repair is often
time-sensitive, has helped the Company to establish a reputation as a "one-
stop" shop for HVAC and refrigeration products. In addition, Pameco provides
its customers with assistance in making intelligent purchases through the
Company's well-trained technical service representatives and counter personnel.
Management believes that its extensive product offerings and knowledgeable
associates help maintain an extensive and loyal customer base.
Pursue regional and national customers. The Company is focused on
opportunities to serve existing and prospective customers on a multi-regional
or national basis, which it believes represents a significant growth
opportunity. In particular, the Company believes that its nationwide coverage
and broad product lines enable it to provide multi-regional and national
accounts with consistent service, greater purchasing leverage, improved
inventory management and centralized billing. This strategy is designed to
complement the Company's established relationships with its local and regional
customers. Management believes the new ThermalZone(TM) private label line of
HVAC equipment and parts, which Pameco introduced in September 1996 and which
is currently available in 47 states, will further increase the Company's
national account opportunities. The Company believes that a nationally
available, standardized HVAC product line will provide large accounts with
greater consistency in price, availability and quality because these accounts
will be able to purchase one uniform product nationwide instead of purchasing a
number of different product lines from different suppliers.
5
<PAGE>
Continued focus on higher margin repair and replacement market. The Company
continues to focus on the higher margin repair and replacement market, from
which Pameco derived over 80.0% of its revenues in fiscal 1997. The repair and
replacement market has increased substantially over the past ten years as a
result of the aging of the installed base of HVAC products, the introduction of
new energy-efficient models and the upgrading of many existing buildings and
homes to central heating and air-conditioning. This installed product base
represents a significant market in terms of recurring revenues, as customers
are continually replacing a percentage of the installed base of equipment each
year. In the refrigeration market, by focusing sales on products used for
repairs, which typically cannot be postponed, the Company's revenues tend to be
less dependent upon national economic cycles.
Operating improvements through supply chain and cost structure
management. Pameco will continue to invest significant resources in its
management information systems. Management believes these systems will allow
the Company to achieve improvements in inventory control and cost management,
and, together with supply chain software to be acquired later this year, will
improve the Company's supply chain strategy, as decisions relating to
purchasing, inventory management and logistics will be more effectively
coordinated. All branches are equipped with computer systems that have the
ability to monitor inventory levels to ensure timely inventory orders and to
guard against unexpected stock shortages. Management believes that improved
distribution practices should reduce the Company's cost per SKU handled and,
over time, increase the Company's inventory turns and fill rate percentages.
Margin enhancement focus. The Company is currently implementing several
measures in an effort to enhance its margins and reduce transaction costs.
These measures include system-related pricing enhancements, such as pricing
discipline through the limitation of discounts at the point-of-sale, and
improved performance from underperforming branches through internal
benchmarking. Additionally, the Company believes it will realize efficiencies
in cost control through the Company's management information system and
logistics network, as well as through improved supply chain dynamics as
described in the immediately preceding paragraph.
COMPANY HISTORY AND RECENT ACQUISITIONS
Pameco is a Georgia corporation which was formed in March 1997 and which will
merge with Pameco Holdings, Inc., a Delaware corporation, and Pameco
Corporation, a Delaware corporation, immediately prior to the Offering (the
"Reincorporation Merger"). While predecessor corporations of the Company date
back to 1931, Pameco was formed in the early 1980s, when the Hillman Company
acquired a number of regional HVAC and refrigeration product distributors.
During the early and mid 1990s, the Company's management focused on controlling
costs and consolidating a decentralized business. In March 1996, in an effort
to refocus the Company on sales growth, Pameco hired a new Chief Executive
Officer with extensive experience in directing sales growth and acquisitions.
The Company's current senior management team is focused on enhancing the
financial performance of the Company, motivated in part by an equity-based
incentive compensation system, and has made significant progress in realigning
the structure and culture of the Company to accelerate growth. During the past
year, the Company has successfully completed the acquisition of 60 branches in
11 states.
In May 1996, Pameco purchased six branches and related assets from Chase. The
Chase branches had revenues in excess of $9.0 million for all of fiscal 1996
and derived approximately 59.0% of their aggregate revenues in fiscal 1996 from
the sale of refrigeration products, with the balance of revenues from the sale
of HVAC products. This acquisition gave the Company a significant presence in
the Chicago, Illinois and Gary, Indiana markets.
6
<PAGE>
In November 1996, the Company acquired 52 branches located in seven
southeastern states from Sid Harvey. These branches had aggregate revenues in
excess of $51.8 million for the year ended December 31, 1996 and derived
significant revenues from the sale of both HVAC and refrigeration products.
In March 1997, the Company purchased the HVAC operations and related assets
of Bellows-Evans, Inc., a distributor of HVAC equipment in Birmingham, Alabama,
a new market for the Company. The acquired business had revenues in excess of
$3.0 million for the year ended May 31, 1996 and derived substantially all of
its revenues from the sale of HVAC products.
In April 1997, the Company purchased the HVAC operations and related assets
of Trigg Supply, Inc., a distributor of HVAC products in Ft. Worth, Texas. The
acquired business had revenues of approximately $1.3 million for the year ended
December 31, 1996 and derived all of its revenues from the sale of HVAC
products.
The Company's executive offices are located at 1000 Center Place, Norcross,
Georgia 30093, and its telephone number is (770) 798-0700.
THE OFFERING
Type of security offered.... Class A Common Stock
Number of shares to be
sold:
<TABLE>
<S> <C>
By the Company................. 3,000,000
By the Selling Shareholders.... 578,644
</TABLE>
Shares to be outstanding
after the Offering(1)(2)...
8,052,747 shares of Common Stock, consisting
of 4,068,901 shares of Class A Common Stock
and 3,983,846 shares of Class B Common Stock.
Use of proceeds.............
To repay existing indebtedness and repurchase
206,847 shares of Common Stock from certain
shareholders, including members of the
Investor Group. See "Use of Proceeds."
Voting rights............... The Class A Common Stock and the Class B
Common Stock will vote as a single class with
respect to all matters submitted to a vote of
the shareholders, with each share of Class A
Common Stock entitled to one vote and each
share of Class B Common Stock entitled to ten
votes, except that (i) the holders of the
Class A Common Stock will be entitled to
elect two directors and the holders of the
Class B Common Stock will be entitled to
elect all other directors; (ii) with respect
to any "going private" transaction between
the Company and a Principal Shareholder (as
defined herein), each share of Class A Common
Stock and Class B Common Stock will be
entitled to one vote and (iii) each class
will have such voting rights as otherwise
provided by law. Each share of Class B Common
Stock is convertible into one share of Class
A Common Stock at the option of the holder
thereof and is automatically convertible into
one share of Class A Common Stock upon
transfer to an unaffiliated party or upon the
date when the number of
7
<PAGE>
outstanding shares of Class B Common Stock is
less than ten percent of all outstanding
Common Stock. Substantially all of the Class
B Common Stock is owned by the Investor
Group. Each class of Common Stock has
identical rights, except with respect to
voting and conversion privileges. See
"Description of Capital Stock" and "Principal
and Selling Shareholders."
Proposed New York Stock
Exchange symbol............
The Class A Common Stock has been approved
for listing on the New York Stock Exchange
subject to notice of issuance under the
symbol "PCN."
(1) Excludes (i) 206,847 shares to be repurchased with a portion of the net
proceeds of the Offering; (ii) 958,092 shares of Class A Common Stock
reserved for issuance under the Employee Stock Option Plans pursuant to
which options to purchase 642,862 shares will be outstanding upon the
closing of the Offering; (iii) 50,000 shares of Class A Common Stock
reserved for issuance under the Non-Employee Directors Stock Option Plan
pursuant to which options to purchase 37,500 shares will be outstanding
upon the closing of the Offering and (iv) 9,375 shares of Class A Common
Stock reserved for issuance under an option grant to one of the non-
employee directors. See "Management--Stock Incentive Plans."
(2) Excludes 62,500 shares of Class B Common Stock subject to an option held by
Terfin International, Ltd. ("Terfin"). See "Certain Transactions."
RISK FACTORS
The Class A Common Stock offered hereby involves a high degree of risk. These
risks include, among others, the risk that (i) the Company will be unable to
identify, complete or successfully integrate the acquisition of a sufficient
number of businesses to implement successfully its growth strategy; (ii) the
Company will experience a decline in sales due to weather patterns or an
economic downturn; (iii) one or more of the Company's key suppliers will
terminate or limit their relationship with the Company, or will otherwise be
unable to furnish quality products on a timely basis, thereby damaging the
Company's relationship with its customers and (iv) certain of the Company's
competitors may have significantly greater financial resources than the
Company, thereby limiting the Company's ability to compete effectively. See
"Risk Factors."
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
The following table sets forth certain consolidated financial and other
operating data for the Company. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28 OR 29,
------------------------------------------------
1993 1994 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $300,140 $338,034 $323,152 $334,537 $378,658
Cost of products sold... 226,894 259,028 243,887 255,301 285,439
-------- -------- -------- -------- --------
Gross profit........... 73,246 79,006 79,265 79,236 93,219
Warehousing, selling and
administrative ex-
penses................. 66,709 71,113 70,467 69,405 81,250
Amortization of negative
goodwill............... (1,122) (1,224) (1,224) (1,224) (1,224)
Severance............... -- -- -- 1,230 --
Executive cash bonus.... -- -- -- -- 2,173
-------- -------- -------- -------- --------
Operating income........ 7,659 9,117 10,022 9,825 11,020
Interest expense, net... 3,570 4,593 4,818 4,732 3,923
Other income (expense).. (898) 770 189 (482) (1,533)
-------- -------- -------- -------- --------
Income before income
taxes.................. 3,191 5,294 5,393 4,611 5,564
Provision (benefit) for
income taxes(1)........ 4,550 585 575 (1,403) (5,592)
-------- -------- -------- -------- --------
Net income (loss)(1).... (1,359) 4,709 4,818 6,014 11,156
Redeemable preferred
stock
dividends.............. -- 621 547 520 424
-------- -------- -------- -------- --------
Net income (loss)
applicable to common
shareholders(2)........ $(1,359) $4,088 $4,271 $5,494 $10,732
======== ======== ======== ======== ========
Net income (loss) per
share(2)(3)............ $(0.21) $0.62 $0.65 $0.83 $1.71
======== ======== ======== ======== ========
Weighted average shares
outstanding(2)......... 6,598 6,598 6,598 6,598 6,258
======== ======== ======== ======== ========
PRO FORMA
(UNAUDITED)(4):
Interest expense, net... $852
========
Net income(1)........... $13,220
========
Net income per
share(5)............... $1.44
========
Weighted average shares
outstanding(5)......... 9,196
========
OTHER OPERATING DATA:
Same branch sales growth
percentage(6).......... 0.7% 2.8% 4.7% 8.0%
Number of branches(7)... 265 245 241 262
Sales per associate(8).. $281,000 $295,000 $309,000 $312,000
</TABLE>
See accompanying notes on the following page.
9
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-----------------------
HISTORICAL PRO FORMA(3)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 145 $ 145
Total current assets.................................... 126,365 126,365
Total assets............................................ 149,369 149,369
Short-term debt:
Current portion of long-term debt..................... 375 375
Notes payable to affiliates........................... 14,100 --
-------- --------
Total short-term debt................................... 14,475 375
Long-term debt to affiliates ........................... 4,500 --
Long-term debt.......................................... 29,879 11,270
Total liabilities....................................... 134,738 97,529
Total shareholders' equity.............................. 14,631 51,840
</TABLE>
- --------------------
(1) The Company recorded a benefit for income taxes of approximately $1.4
million and $5.6 million for the years ended February 29, 1996 and February
28, 1997, respectively, resulting primarily from the Company reducing its
deferred income tax asset valuation allowance by $1.8 million and $6.5
million at February 29, 1996 and February 28, 1997, respectively, in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Reduction of the deferred
income tax asset valuation allowance was determined to be "more likely than
not." The "more likely than not" determination was based on the factors
described in Note 7 to the Consolidated Financial Statements. At February
28, 1997, the Company had a deferred income tax asset valuation allowance
of $1.8 million. Future changes to the deferred income tax asset valuation
allowance will be based on the criteria in SFAS No. 109.
(2) Computed on the basis described in Note 1 to the Consolidated Financial
Statements of Pameco.
(3) If the acquisitions of Sid Harvey and Chase had occurred on March 1, 1995,
the pro forma net income and net income per share would have been
approximately $5.4 million and $10.6 million and $0.82 and $1.69 for the
years ended February 29, 1996 and February 28, 1997, respectively. The pro
forma adjustments for the acquisitions are based upon available information
and certain assumptions that management believes are reasonable. The
adjustments to the historical data reflect the following: (i) general and
administrative costs were increased to reflect the incremental amount of
general and administrative costs Pameco estimates it would have incurred
over the applicable time period; (ii) interest expense assuming Pameco
financed the acquisitions at a rate of 7.3%--Pameco's weighted average
borrowing rate; (iii) amortization of the excess of cost over acquired net
assets; (iv) income taxes on the earnings of the acquirees have been
adjusted to reflect Pameco's effective tax rate and (v) the income tax
effect of such pro forma adjustments.
(4) The pro forma amounts give effect to the sale of 3,000,000 shares of Class
A Common Stock by Pameco at an assumed initial public offering price of
$14.00 per share and the application of the net proceeds therefrom to repay
approximately $37.2 million in short-term and long-term debt as if such
issuance had occurred at the beginning of the period, the related reduction
in interest expense and the repurchase of 206,847 shares of the Company's
common stock. See "Use of Proceeds." The pro forma amounts do not give
effect to the acquisitions of Sid Harvey and Chase as discussed in Note (3)
above.
(5) Pro forma net income per share was computed using the weighted average
number of common and common equivalent shares outstanding as described
above, and takes into account the reduction in interest expense from the
repayment of short-term and long-term debt of $37.2 million with proceeds
of the Offering as if such shares had been issued and repayment had
occurred at the beginning of the fiscal period, and the repurchase of
206,847 shares of the Company's common stock. Pro forma net income per
share does not give effect to the acquisitions of Sid Harvey and Chase as
discussed in Note (3) above. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and common stock
equivalents issued at prices below the assumed Offering price per share
("cheap stock") during the 12 month period immediately preceding the
initial filing date of the Company's Registration Statement for its public
offering have been included as outstanding for all periods presented (using
the treasury stock method at the assumed initial public offering price).
(6) Same branch sales growth percentage was calculated based on sales for
locations open at least 24 consecutive months as of the end of each
reported period. The data for 1994 and 1995 is presented on a calendar year
basis, which is the only data available to the Company.
(7) The number of branches discloses the average number of branches open during
the period.
(8) Sales per associate have been calculated by dividing net sales by the
average number of associates employed during the period. The average number
of associates was determined by dividing the sum of the number of
associates at the end of each month in the period by the number of months
in the period.
10
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results in the timing of
certain events could differ materially from those projected in the forward-
looking statements due to a number of factors, including those set forth below
and elsewhere in this Prospectus. Prospective purchasers of the shares of
Class A Common Stock offered hereby should consider carefully the specific
factors set forth below as well as the other information contained in this
Prospectus in evaluating an investment in the Class A Common Stock.
RISK ASSOCIATED WITH ACQUISITION STRATEGY
The Company acquired the assets of four businesses during the past year. The
Company's growth strategy contemplates additional acquisitions, and management
is continually evaluating acquisition opportunities. As a result, the
Company's future success is dependent, in part, upon whether it can identify,
finance and acquire suitable acquisition candidates on favorable terms and
then to integrate or manage such acquired businesses successfully.
Acquisitions involve special risks, including risks associated with
unanticipated problems, liabilities and contingencies, diversion of management
attention and possible adverse effects on earnings resulting from increased
goodwill amortization, potential increased interest costs, the issuance of
additional securities and difficulties relating to the integration of the
acquired businesses. There can be no assurance that the Company will be able
to identify and complete or successfully integrate the acquisition of a
sufficient number of businesses to implement successfully its growth strategy.
Further, there can be no assurance that future acquisitions will not have an
adverse effect upon the Company's operating results, particularly during
periods in which the operations of acquired businesses are being integrated
into the Company's operations. While management is continually evaluating
possible acquisitions, particularly in larger markets in which the Company
does not have a substantial presence, the Company has no present agreements,
commitments or understandings to acquire other businesses. Existing or future
competitors may also seek to compete with the Company for acquisition
candidates, which could have the effect of increasing the price for
acquisitions or reducing the number of suitable acquisition candidates. In
addition, such competitors may compete with the Company for start-up
locations, thereby limiting the number of attractive locations for expansion.
See "Prospectus Summary--Company History and Recent Acquisitions," "--
Substantial Competition" and "Business--Business Strategy."
In order to implement its acquisition strategy, the Company is likely to
require additional funding. Future acquisitions could be financed by incurring
additional indebtedness or by the issuance of additional equity securities,
which could result in dilution to the purchasers of the Class A Common Stock
offered hereby. See "--Potential Effect of Shares Eligible for Future Sale on
Price of Common Stock." In addition, significant acquisitions and the
financing thereof will generally require the consent of the Company's existing
lenders, and there can be no assurance that such consent will be granted. See
"Business--Competition."
SEASONALITY AND CYCLICALITY OF SALES
The Company's operating results vary significantly from quarter to quarter.
Sales typically increase during the warmer months beginning in April and peak
in the months of June, July and August. For the years ended February 29, 1996
and February 28, 1997, the Company recorded approximately 33.0% and 31.0%,
respectively, of its sales, and approximately 76.0% and 69.0%, respectively,
of its annual operating earnings (excluding the effect of non-recurring
charges) in the second fiscal quarter of each year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Selected Quarterly Operating Results." Sales of HVAC and refrigeration
equipment and replacement components are also affected by weather patterns
throughout the country. Warmer than normal summer temperatures or colder than
normal winter temperatures cause increased stress on cooling and heating
equipment. Increased stress on equipment produces higher failure rates and
therefore increased sales volume of replacement equipment. A dramatic shift in
weather patterns (such as an especially mild winter or cool summer) in a
particular region of the country could have a material adverse
11
<PAGE>
effect on the Company's business and results of operations. Further, end-
users' demand for HVAC and refrigeration products is cyclical, and a
significant percentage of the overall demand is related to new construction.
This demand is influenced by many of the same national and regional economic
and demographic factors which affect demand for durable consumer goods,
including consumer confidence, interest rates, availability of financing,
regional population, employment trends and general economic conditions. There
can be no assurance that the Company will not experience future declines in
sales due to weather patterns or an economic downturn or that such declines
will not have a material adverse effect on the Company's business and results
of operations. See "Business--The Industry."
DEPENDENCE ON SUPPLIER RELATIONSHIPS
Pameco has been granted distribution rights for certain product lines in
several of its geographic markets. The Company depends upon these distribution
rights for a substantial portion of its business. However, a significant
percentage of the Company's distribution arrangements with its suppliers are
oral. Further, many of these distribution rights may be terminated by the
supplier immediately or upon short notice. Certain of the Company's suppliers
compete with the Company for new construction business and there can be no
assurance that any or all suppliers will continue their current relationship
with the Company. The termination or limitation by any key supplier of its
relationship with the Company could have a material adverse effect on the
Company's business and results of operations. The Company also relies upon its
suppliers to provide quality products on a timely basis. See "--Substantial
Competition." The failure of a significant supplier to furnish quality
products on a timely basis for any reason could damage the Company's
relationship with its customers and have a material adverse effect on its
business and results of operations. See "Business--Suppliers and Customers."
SUBSTANTIAL COMPETITION
Both the HVAC and refrigeration businesses are highly fragmented and very
competitive. The Company's primary competitors include national and multi-
regional companies, regional competitors that operate in a small number of
states, OEMs and principally small, independent businesses with a limited
number of local branches. Certain of the Company's competitors may have
significantly greater financial resources than the Company. The primary areas
of competition in the HVAC and refrigeration businesses include breadth and
quality of product lines distributed, ability to fill orders promptly
(particularly in the refrigeration business), technical knowledge of sales
personnel, service and price. The Company believes that its ability to compete
effectively is dependent upon whether it can respond to the needs of its
customers through quality service and product availability. While home
centers, hardware stores and direct mail order companies do not currently
compete to a significant extent with the Company due to their limited ability
to supply a wide range of products and provide comparable expert technical
advice, the entrance of one or more of these companies into either of the
Company's businesses could have a material adverse effect on the Company's
business and results of operations. In the future, the Company may also face
competition from deregulated utility companies selling directly to their
customers, electrical/plumbing suppliers, organizations providing facility
maintenance services and others selling products directly to consumers via the
Internet. The entrance of any one or more of these types of entities into
either of the Company's markets could have a material adverse effect on the
Company's business and results of operations. See "Business--Competition."
INCREASED PRESENCE OF BUYING GROUPS; POTENTIAL REDUCTION OF MARGINS
Management believes that a portion of the Company's customer base has begun
to consolidate into regional and national firms and buying groups in order to
gain increased purchasing power and greater product consistency. This
increased buying power could create a competitive bidding process for the
Company's products, thereby reducing the Company's margins. A significant
reduction in the Company's margins could have a material adverse effect on the
Company's business and results of operations. See "Business--Competition."
12
<PAGE>
DEPENDENCE ON INFORMATION SYSTEMS
The Company believes that its computer systems are an integral part of its
business and growth strategies. The Company depends on its information systems
to process orders, manage inventory and accounts receivable collections,
purchase products, ship products among its branches on a timely basis,
maintain cost-effective operations and provide superior service to its
customers. The Company intends to purchase new supply chain software in fiscal
1998 in order to improve its inventory management. There can be no assurance
that a disruption in the operation of the Company's information systems,
including the failure of the new supply chain software to function properly,
will not occur. Any such disruption could have a material adverse effect on
the Company's business and results of operations. See "Business--Management
Information Systems."
PENDING LITIGATION
The Company is a defendant in a lawsuit filed by United Refrigeration, Inc.
("United"), a competitor of the Company, in which it is alleged that Pameco
tortiously interfered with United's contract to purchase Sid Harvey's
southeastern business operations. A significant judgment against the Company
in favor of United could have a material adverse effect on the Company's
business and results of operations. See "Business--Legal Proceedings."
DEPENDENCE ON KEY ASSOCIATES; NEED FOR ADDITIONAL ASSOCIATES
The Company's future performance depends to a significant degree upon the
continued contributions of members of the Company's key management. The loss
of the service of any key management associate could have a material adverse
effect on the Company's business and results of operations. The Company does
not have employment agreements with any of its key management associates
except for its Chief Executive Officer. See "Business--Associates" and
"Management."
The Company's management believes that Pameco's future success also depends
upon whether it can identify, attract, train and retain highly skilled
regional managers and technical service representatives to advise and assist
customers at its branches. Competition for such personnel is intense and there
can be no assurance that the Company will be successful in retaining its
existing regional managers and technical service representatives or attracting
and assimilating additional technical service representatives. The inability
of the Company to attract and retain such associates could have a material
adverse effect on the Company's business and results of operations.
POTENTIAL OBSOLESCENCE OF INVENTORY
At February 28, 1997, over 70.0% of the Company's assets (based on book
value) consisted of inventory held for sale. The obsolescence of a significant
amount of inventory due to changes in customer preferences or technological
improvements or the loss of a significant amount of inventory due to shrinkage
could have a material adverse effect on the Company's business and results of
operations.
RISKS OF BORROWING
Following the Offering, the Company will have substantial borrowings under
the Credit Facilities (as defined herein). In the future, the Company may
incur additional indebtedness under the Credit Facilities or under additional
facilities for working capital and to finance the acquisition of additional
branches. Leverage increases the risk to the Company of any variations in its
results of operations or any other factors affecting its cash flow or
liquidity. In addition, the Credit Facilities bear, and future indebtedness
may bear, interest at variable interest
13
<PAGE>
rates. Accordingly, increases in applicable interest rates may adversely
affect the Company's business and results of operations. See "Description of
Certain Indebtedness."
CONTROL OF THE COMPANY BY INVESTOR GROUP
Holders of the Class A Common Stock are entitled to one vote per share,
while holders of the Class B Common Stock are generally entitled to ten votes
per share. In addition, holders of the Class B Common Stock are entitled to
elect all but two of the Company's directors. Immediately after consummation
of the Offering, the Investor Group will beneficially own 97.2% of the
outstanding shares of Class B Common Stock, and, together with the executive
officers and directors of the Company as a group, will own in the aggregate
88.9% of the combined voting power (on a fully diluted basis).
Due to the Investor Group's ownership of substantially all the Class B
Common Stock, the Investor Group will, immediately after consummation of the
Offering, be able to elect a majority of the directors of the Company and
therefore control and direct the policies of the Board. In addition, the
Investor Group will be able to control the vote on almost all matters
submitted to a vote of the Company's shareholders, including most
extraordinary transactions such as mergers and sales of all or substantially
all of the Company's assets. Control by the Investor Group may also discourage
certain types of transactions involving an actual or potential change of
control of the Company, including transactions in which the holders of Class A
Common Stock might have received a premium for their shares over then
prevailing market prices.
Shares of Class B Common Stock will only convert to shares of Class A Common
Stock on election by the holder, transfer to a transferee who is not an
Affiliate (as herein defined) of the holder or on the date when the issued and
outstanding shares of Class B Common Stock constitute less than ten percent of
all issued and outstanding Common Stock. See "Description of Capital Stock--
Common Stock" and "Principal and Selling Shareholders."
ANTI-TAKEOVER CONSIDERATIONS; POTENTIAL EFFECT OF ISSUANCE OF PREFERRED STOCK
ON PRICE OF COMMON STOCK
The ownership positions of the Investor Group and the executive officers and
directors of the Company as a group, together with the anti-takeover effects
of certain provisions in the Company's Articles of Incorporation and Bylaws
and the Company's adoption of both the "fair price" and "business combinations
with interested stockholders" provisions of the Georgia Business Corporation
Code (the "Georgia Code"), may have the effect of delaying, deferring or
preventing a change of control of the Company, even if a change of control
were in the shareholders' best interests.
In addition, the Company's Board of Directors is authorized to establish the
rights, preferences and limitations of any or all shares of Preferred Stock
and to divide such shares into classes, with or without voting rights, as the
Board may determine. The issuance of Preferred Stock could decrease the amount
of earnings and assets available for distribution to holders of Common Stock
and could have the effect of making removal of management more difficult. In
certain circumstances, this could have the effect of decreasing the market
value of the Common Stock. See "Description of Capital Stock--Preferred Stock"
and "--Certain Provisions of Georgia Law and the Company's Articles of
Incorporation and Bylaws."
SIGNIFICANT GOVERNMENT REGULATIONS
HVAC and refrigeration systems are subject to various environmental statutes
and regulations, including but not limited to laws and regulations
implementing the Clean Air Act, relating to minimum energy efficiency
standards of HVAC systems and the production, servicing and disposal of
certain ozone-depleting refrigerants used in such systems. As the owner or
lessee of a significant amount of real property, the Company is subject to
14
<PAGE>
a number of environmental statutes and regulations and could under certain
circumstances be responsible for the acts or omissions of the prior owners or
lessees of such property. The Company is also subject to regulations
concerning the transport of hazardous materials, including regulations adopted
pursuant to the Motor Carrier Safety Act of 1990. The Company may become
subject to compliance with additional regulations, and there can be no
assurance that the regulatory environment in which the Company operates will
not change significantly in the future. See "Business--Government Regulations
and Environmental Matters."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Company's
Class A Common Stock. The Company intends to apply for listing of the Class A
Common Stock on the New York Stock Exchange. Regardless of whether the Class A
Common Stock is listed on the New York Stock Exchange, there can be no
assurance as to the development or liquidity of any trading market for the
Class A Common Stock or that the purchasers of the Class A Common Stock will
be able to resell their shares at prices equal to or greater than the initial
public offering price. The initial public offering price of the Class A Common
Stock will be determined through negotiations with Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), The Robinson-Humphrey Company, Inc.
("Robinson-Humphrey") and Schroder Wertheim & Co. Incorporated ("Schroder
Wertheim") (collectively, the "Representatives"). See "Underwriting" for the
factors to be considered in determining the initial public offering price of
the shares of Class A Common Stock.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Immediately after completion of the Offering, the Company will have
8,052,747 shares of Common Stock outstanding, of which the 3,578,644 shares
sold pursuant to the Offering will be freely tradable without restriction or
further registration under the Securities Act, except those shares acquired by
"affiliates" of the Company as that term is defined under the Securities Act.
Holders of the remaining shares will be eligible to sell such shares pursuant
to Rule 144 ("Rule 144") under the Securities Act at prescribed times and
subject to the manner of sale, volume, notice and information restrictions of
Rule 144. The Company, its officers, directors and certain other shareholders
including the Selling Shareholders, who collectively own 403,228 shares and
hold options to acquire an aggregate of 543,667 shares of Class A Common Stock
and who collectively own 3,983,846 shares of Class B Common Stock, have agreed
with the Underwriters, except with the prior written consent of DLJ and
subject to certain limited exceptions, not to offer, sell, pledge, contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of directly or indirectly any shares of Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for Common
Stock or in any other manner transfer all or a portion of the economic
consequences associated with the ownership of any Common Stock for a period of
180 days after the date of this Prospectus. Upon the expiration of such 180
day period, such holders will, in general, be entitled to dispose of their
shares, although the shares of Common Stock held by affiliates of the Company
will continue to be subject to the restrictions of Rule 144. In addition, the
Company may issue shares of Class A Common Stock (and may consider filing a
registration statement with respect to such shares) in connection with
potential future business acquisitions and resales of such shares by the
recipients. Shares so registered could be sold in the public market. No
predictions can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for sale will have on the market
price for shares of Class A Common Stock prevailing from time to time. Sales
of substantial amounts of shares of Class A Common Stock in the public market
following the Offering could adversely affect the market price of the Class A
Common Stock and could impair the Company's future ability to raise capital
through an offering of equity securities. See "Shares Eligible for Future
Sale."
VOLATILITY OF MARKET PRICE
After completion of the Offering, the market price of the Class A Common
Stock could be subject to significant fluctuations due to variations in
quarterly operating results and other factors, such as changes in
15
<PAGE>
general conditions in the economy or the financial markets, natural disasters
or other developments affecting the Company or its competitors. In addition,
the securities markets have experienced significant price and volume
fluctuations from time to time in recent years. This volatility has had a
significant effect on the market prices of securities issued by many companies
for reasons unrelated to their operating performance, and these broad
fluctuations may adversely affect the market price of the Class A Common
Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Class A Common Stock offered hereby will
experience immediate and substantial dilution in the net tangible book value
per share of Class A Common Stock from the initial public offering price.
Based on an assumed initial offering price of $14.00 per share, as of February
28, 1997, such dilution, on a pro forma basis, would have been equal to $7.70
per share with respect to shares purchased pursuant to the Offering. See
"Dilution."
ABSENCE OF DIVIDENDS
The Company intends to retain its earnings to finance its growth and for
general corporate purposes. Consequently, it does not anticipate paying any
cash dividends in the foreseeable future. In addition, the Credit Facilities,
which will remain in place following consummation of the Offering, contain,
and future financing agreements may contain, limitations on the payment of
cash dividends and other distributions of assets. See "Dividend Policy" and
"Description of Certain Indebtedness."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $38.4 million ($45.4 million if the Underwriters' over-allotment
option is exercised in full) assuming an initial public offering price of
$14.00 per share and after deduction of the estimated underwriting discount
and other estimated offering expenses. The Company intends to use such net
proceeds to repay all outstanding indebtedness to certain members and
affiliates of the Investor Group, to repay approximately $18.6 million of the
outstanding balance of its $100.0 million revolving credit line (the "Working
Capital Facility"), and to repurchase 206,847 shares of Common Stock from
certain shareholders, including members of the Investor Group, for an
aggregate purchase price of approximately $1.2 million. The outstanding
balance of indebtedness to certain members and affiliates of the Investor
Group at February 28, 1997 was $18.6 million. See "Certain Transactions."
The indebtedness to be repaid to certain members and affiliates of the
Investor Group consists of two separate loans. The first, which bears interest
at the rate of 12.5%, matures on June 30, 1997, and was incurred in November
1996 for the purpose of redeeming all of the common and preferred stock of the
Company owned by a former shareholder. The Company expects the outstanding
balance of such indebtedness to be $6.6 million immediately prior to the
Offering. The other indebtedness to be repaid to certain members and
affiliates of the Investor Group bears interest at the prime rate (adjusted
daily) and matures at September 1, 2001, and November 1, 2001, and has a
current outstanding principal amount of $4.5 million. The Working Capital
Facility expires on November 22, 2001, unless extended, and bears interest at
LIBOR plus 2.25%. At February 28, 1997, this rate was equal to 7.69%. Upon
application of the net proceeds from the Offering, the Company expects to have
borrowings of approximately $48.0 million under the Credit Facilities and
approximately $44.0 million of unused and available credit. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Certain Indebtedness."
The Company will not receive any of the proceeds from the sale of shares of
Class A Common Stock offered by the Selling Shareholders.
16
<PAGE>
DIVIDEND POLICY
The Company has not paid dividends on its Class A Common Stock, and the
Board of Directors intends to continue a policy of retaining earnings to
finance the Company's growth and for general corporate purposes and,
therefore, does not anticipate paying any such dividends in the foreseeable
future. In addition, the Company's Working Capital Facility contains, and
future financing arrangements may contain, a minimum net worth covenant and
limitations on the payment of any cash dividends or other distributions of
assets, which covenants and limitations could restrict the Company's ability
to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Certain Indebtedness."
DILUTION
As of February 28, 1997, the net tangible book value of the Company was
approximately $12.4 million, or $2.44 per share of Common Stock. "Net tangible
book value per share" is defined as the book value of tangible assets of the
Company, less all liabilities (except the excess of acquired net assets over
cost), divided by the number of outstanding shares of Common Stock. After
giving effect to the Offering at an assumed initial public offering price of
$14.00 per share, net of offering expenses and the underwriting discount, and
the application of the net proceeds therefrom as described under "Use of
Proceeds", the pro forma net tangible book value of the Company at February
28, 1997, would have been approximately $49.7 million, or $6.30 per share.
This represents an immediate dilution of $7.70 per share to purchasers of
shares in the Offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $14.00
Net tangible book value before the Offering................. $2.44
Increase per share attributable to new shareholders......... 3.86
-----
Pro forma net tangible book value per share after giving ef-
fect to the Offering......................................... 6.30
------
Dilution in net tangible book value per share to new share-
holders...................................................... $ 7.70
======
</TABLE>
The following table sets forth with respect to the existing shareholders and
the new shareholders in the Offering as of February 28, 1997, a comparison of
the number of shares of Common Stock acquired from the Company, the percentage
ownership of such shares, the total consideration paid, the percentage of
total cash consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).... 4,880,778 61.9% $ 1,905,000 4.3% $ 0.39
New shareholders............ 3,000,000 38.1 42,000,000 95.7 14.00
--------- ----- ----------- -----
Total................... 7,880,778 100.0% $43,905,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------------
(1) Shares are net of 1,477,222 shares of Class A Common Stock held by the
Company as treasury stock.
The foregoing table excludes (i) 206,847 shares to be repurchased with a
portion of the net proceeds of the Offering; (ii) 958,092 shares of Class A
Common Stock reserved for issuance under the Employee Stock Option Plans
pursuant to which options to purchase 642,862 shares will be outstanding upon
the closing of the Offering; (iii) 50,000 shares of Class A Common Stock
reserved for issuance under the Non-Employee Directors Stock Option Plan
pursuant to which options to purchase 37,500 shares will be outstanding upon
the closing of the Offering and (iv) 9,375 shares of Class A Common Stock
reserved for issuance under an option grant to one of the non-employee
directors. See "Management--Stock Incentive Plans." The table also excludes
62,500 shares of Class B Common Stock subject to an option held by Terfin. See
"Certain Transactions."
17
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt, long-term debt and
capitalization of the Company as of February 28, 1997 and as adjusted to give
pro forma effect to the Offering at an assumed initial public offering price
of $14.00 per share and the application of the net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction
with the selected financial data and Consolidated Financial Statements of the
Company and the related notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-----------------------------
HISTORICAL PRO FORMA
-------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
Short-term debt:
Current portion of capital lease obligations
and other debt............................... $ 375 $ 375
Notes payable to affiliates................... 14,100 --
------------- -------------
Total short-term debt....................... 14,475 375
Long-term notes payable to affiliates........... 4,500 --
Long-term debt and capital lease obligations.... 29,879 11,270
Shareholders' equity:
Preferred Stock, par value $1.00 per share,
25,000,000 shares authorized; no shares
issued and outstanding....................... -- --
Class A Common Stock, par value $0.01 per
share, 40,000,000 shares authorized;
6,358,000 shares issued and outstanding
(historical); 5,525,748 shares issued and
outstanding (pro forma)(1)................... 64 54
Class B Common Stock, par value $0.01 per
share, 20,000,000 shares authorized; no
shares issued and outstanding (historical);
3,983,846 shares issued and outstanding (pro
forma)(2).................................... -- 40
Additional paid-in capital.................... 1,841 40,221
Retained earnings............................. 23,226 23,226
------------- -------------
25,131 63,541
Less: treasury stock, at cost (1,250,000
shares and 1,477,222 shares of Class A Common
Stock, respectively)......................... (10,500) (11,701)
------------- -------------
Total shareholders' equity.................. 14,631 51,840
------------- -------------
Total capitalization including short-term
debt....................................... $ 63,485 $ 63,485
============= =============
</TABLE>
- ---------------------
(1) Does not include (i) 958,092 shares of Class A Common Stock reserved for
issuance under the Employee Stock Option Plans pursuant to which options
to purchase 642,862 shares will be outstanding upon the closing of the
Offering; (ii) 50,000 shares of Class A Common Stock reserved for issuance
under the Non-Employee Directors Stock Option Plan pursuant to which
options to purchase 37,500 shares will be outstanding upon the closing of
the Offering and (iii) 9,375 shares of Class A Common Stock reserved for
issuance under an option grant to one of the non-employee directors. See
"Management--Stock Incentive Plans."
(2) Does not include 62,500 shares of Class B Common Stock subject to an
option held by Terfin. See "Certain Transactions."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
The following selected consolidated and other operating data of the Company
are qualified by reference to, and should be read in conjunction with, the
Consolidated Financial Statements and Notes thereto and other financial data
included elsewhere in this Prospectus. The financial data set forth below for
each of the three years for the period ended February 29, 1997 have been
derived from the audited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. The financial data as of and for the
years ended February 28, 1993 and 1994 have been derived from audited
consolidated financial statements of the Company not included in this
Prospectus. These historical results are not necessarily indicative of the
results that may be expected in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 OR 29,
------------------------------------------------
1993 1994 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $300,140 $338,034 $323,152 $334,537 $378,658
Cost of products sold... 226,894 259,028 243,887 255,301 285,439
-------- -------- -------- -------- --------
Gross profit........... 73,246 79,006 79,265 79,236 93,219
Warehousing, selling and
administrative ex-
penses................. 66,709 71,113 70,467 69,405 81,250
Amortization of negative
goodwill............... (1,122) (1,224) (1,224) (1,224) (1,224)
Severance............... -- -- -- 1,230 --
Executive cash bonus.... -- -- -- -- 2,173
-------- -------- -------- -------- --------
Operating income........ 7,659 9,117 10,022 9,825 11,020
Interest expense, net... 3,570 4,593 4,818 4,732 3,923
Other income (expense).. (898) 770 189 (482) (1,533)
-------- -------- -------- -------- --------
Income before income
taxes.................. 3,191 5,294 5,393 4,611 5,564
Provision (benefit) for
income taxes(1)........ 4,550 585 575 (1,403) (5,592)
-------- -------- -------- -------- --------
Net income (loss)(1).... (1,359) 4,709 4,818 6,014 11,156
Redeemable preferred
stock
dividends.............. -- 621 547 520 424
-------- -------- -------- -------- --------
Net income (loss)
applicable to common
shareholders(2)........ $(1,359) $4,088 $4,271 $5,494 $10,732
======== ======== ======== ======== ========
Net income (loss) per
share(2)(3)............ $(0.21) $0.62 $0.65 $0.83 $1.71
======== ======== ======== ======== ========
Weighted average shares
outstanding(2)......... 6,598 6,598 6,598 6,598 6,258
======== ======== ======== ======== ========
PRO FORMA
(UNAUDITED)(4):
Interest expense, net... $852
========
Net income(1)........... $13,220
========
Net income per
share(5)............... $1.44
========
Weighted average shares
outstanding(5)......... 9,196
========
OTHER OPERATING DATA:
Same branch sales growth
percentage(6).......... 0.7% 2.8% 4.7% 8.0%
Number of branches(7)... 265 245 241 262
Sales per associate(8).. $281,000 $295,000 $309,000 $312,000
</TABLE>
See accompanying notes on the following page.
19
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
---------------------------------------------
1993 1994 1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 258 $ 133 $ 120 $ 115 $ 145
Total current assets............ 114,281 120,008 121,583 113,637 126,365
Total assets.................... 115,951 122,512 124,964 119,167 149,369
Long-term debt, including
current portion................ 27,415 31,051 31,212 34,428 30,254
Debt to affiliates.............. 17,500 13,500 13,500 7,500 18,600
Redeemable preferred stock...... 4,000 4,000 4,000 4,000 --
Total liabilities............... 116,310 118,783 116,964 105,673 134,738
Total shareholders' equity
(deficit)...................... (359) 3,729 8,000 13,494 14,631
</TABLE>
- ---------------------
(1) The Company recorded a benefit for income taxes of approximately $1.4
million and $5.6 million for the years ended February 29, 1996 and
February 28, 1997, respectively, resulting primarily from the Company
reducing its deferred income tax asset valuation allowance by $1.8 million
and $6.5 million at February 29, 1996 and February 28, 1997, respectively,
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Reduction of the deferred
income tax asset valuation allowance was determined to be "more likely
than not." The "more likely than not" determination was based on the
factors described in Note 7 to the Consolidated Financial Statements. At
February 28, 1997, the Company had a deferred income tax asset valuation
allowance of $1.8 million. Future changes to the deferred income tax asset
valuation allowance will be based on the criteria in SFAS No. 109.
(2) Computed on the basis described in Note 1 to the Consolidated Financial
Statements of Pameco.
(3) If the acquisitions of Sid Harvey and Chase had occurred on March 1, 1995,
the pro forma net income and net income per share would have been
approximately $5.4 million and $10.6 million and $0.82 and $1.69 for the
years ended February 29, 1996 and February 28, 1997, respectively. The pro
forma adjustments for the acquisitions are based upon available
information and certain assumptions that management believes are
reasonable. The adjustments to the historical data reflect the following:
(i) general and administrative costs were increased to reflect the
incremental amount of general and administrative costs Pameco estimates it
would have incurred over the applicable time period; (ii) interest expense
assuming Pameco financed the acquisitions at a rate of 7.3%--Pameco's
weighted average borrowing rate; (iii) amortization of the excess of cost
over acquired net assets; (iv) income taxes on the earnings of the
acquirees have been adjusted to reflect Pameco's effective tax rate and;
(v) the income tax effect of such pro forma adjustments.
(4) The pro forma interest expense (net), net income, net income per share and
weighted average shares outstanding gives effect to the sale of 3,000,000
shares of Class A Common Stock by Pameco at an assumed initial public
offering price of $14.00 per share and the application of the net proceeds
therefrom to repay approximately $37.2 million in short-term and long-term
debt as if such issuance had occurred at the beginning of the period, the
related reduction in interest expense and the repurchase of 206,847 shares
of the Company's common stock. See "Use of Proceeds." The pro forma
amounts do not give effect to the acquisitions of Sid Harvey and Chase as
discussed in Note (3) above.
(5) Pro forma net income per share was computed using the weighted average
number of common and common equivalent shares outstanding as described
above, and takes into account the reduction in interest expense from the
repayment of short-term and long-term debt of $37.2 million with proceeds
of the Offering as if such shares had been issued and repayment had
occurred at the beginning of the fiscal period and the repurchase of
206,847 shares of the Company's common stock. Pro forma net income per
share does not give effect to the acquisitions of Sid Harvey and Chase as
discussed in Note (3) above. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and common stock
equivalents issued at prices below the assumed Offering price per share
("cheap stock") during the twelve month period immediately preceding the
initial filing date of the Company's Registration Statement for its public
offering have been included as outstanding for all periods presented
(using the treasury stock method at the assumed initial public offering
price).
(6) Same branch sales growth percentage was calculated based on sales for
locations open at least 24 consecutive months as of the end of each
reported period. The data for 1994 and 1995 is presented on a calendar
year basis, which is the only data available to the Company.
(7) The number of branches discloses the average number of branches open
during the period.
(8) Sales per associate have been calculated by dividing net sales by the
average number of associates employed during the period. The average
number of associates was determined by dividing the sum of the number of
associates at the end of each month in the period by the number of months
in the period.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto included elsewhere in this Prospectus.
GENERAL
Pameco is one of the largest distributors of HVAC and refrigeration products
in the United States, with predecessor corporations dating back to 1931. The
Company stocks more than 65,000 SKUs to service more than 45,000 customers
through a national network of 294 branches in 44 states and Guam located in 76
of the top 100 SMSAs in the country.
The Company derives its revenue primarily from two sources: (i) the sale of
HVAC parts and equipment and (ii) the sale of refrigeration parts and
equipment. In fiscal 1997, the Company's HVAC business generated approximately
57.0% of its revenues, while the refrigeration business generated the balance.
In fiscal 1997, the Company sold approximately 80.0% of its products to the
higher margin repair and replacement market with the remaining 20.0% of its
revenues generated from the new construction and installation market. Growth
in revenue is dependent on several factors, including the life cycle and
average use of HVAC and refrigeration equipment, the number of suitable
acquisition candidates, fluctuations in weather and general economic
conditions.
In March 1996, Pameco hired a new Chief Executive Officer with extensive
experience in directing sales growth and acquisitions. Since then, the Company
has achieved same store sales growth of 8.0% and has completed four
acquisitions pursuant to which it acquired 60 branches in 11 states.
The Company has historically financed its acquisitions, new branch openings
and capital expenditures through internally generated cash flow and borrowings
under the Credit Facilities. During the initial phase of an acquisition or new
branch opening, the Company typically incurs expenses related to installing or
converting information systems, training employees and other reconfiguring
activities. In addition, in larger acquisitions, such as the Sid Harvey
transaction, the Company may incur additional expenses in connection with the
closure of redundant branches. The Company has accounted for its acquisitions
under the purchase method of accounting.
SEASONALITY
The Company's operating results vary significantly from quarter to quarter.
Sales typically increase during the warmer months beginning in April and peak
in the months of June, July and August. For the years ended February 29, 1996
and February 28, 1997, the Company recorded approximately 33.0% and 31.0%,
respectively, of its sales, and approximately 76.0% and 69.0%, respectively,
of its annual operating earnings (excluding the effect of non-recurring
charges) in the second fiscal quarter of each year. See "--Selected Quarterly
Operating Results."
Sales of HVAC and refrigeration equipment and replacement components are
also affected by weather patterns and seasonal equipment start-ups. Warmer
than normal summer temperatures or colder than normal winter temperatures
cause increased stress on cooling and heating equipment. Increased stress on
equipment produces higher failure rates and therefore increased sales volume
of replacement equipment. Start-up modes for inactive equipment also produce
higher failure rates and an increase in replacement business on a seasonal
basis. Management believes the Company's national branch coverage mitigates
much of the risk associated with regional or local weather patterns.
21
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited consolidated financial data
for the eight fiscal quarters through February 28, 1997. This data has been
derived from the Consolidated Financial Statements of the Company and, in the
opinion of management, includes all adjustments necessary for a fair
presentation in accordance with generally accepted accounting principles. The
Company's revenues and operating results have historically fluctuated from
quarter to quarter, and the Company expects that they will continue to do so
in the future. These fluctuations have been caused by a number of factors,
including seasonal customer demand (principally due to the effects of
weather), general economic conditions in the Company's markets, the timing of
acquisitions and the effectiveness of integrating acquired businesses. The
Company's results of operations for a particular quarter are not necessarily
indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
------------------------------------- -------------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 29, MAY 31, AUG. 31, NOV. 30, FEB. 28,
1995 1995 1995 1996 1996 1996 1996 1997
------- -------- -------- -------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $80,160 $108,738 $78,828 $66,811 $94,327 $118,126 $84,686 $81,519
Cost of products sold.. 61,754 83,446 60,335 49,766 72,314 88,698 64,108 60,319
------- -------- ------- ------- ------- -------- ------- -------
Gross profit............ 18,406 25,292 18,493 17,045 22,013 29,428 20,578 21,200
Gross profit
percentage............ 23.0% 23.3% 23.5% 25.5% 23.3% 24.9% 24.3% 26.0%
Warehousing, selling
and administrative
expenses.............. $16,494 $16,888 $17,152 $17,647 $19,440 $20,336 $19,075 $21,175
Warehousing, selling
and administrative
expenses as a
percentage of net
sales................. 20.6% 15.5% 21.8% 26.4% 20.6% 17.2% 22.5% 26.0%
Severance.............. -- -- -- $1,230 -- -- -- --
Executive cash bonus... -- -- -- -- -- -- -- $2,173
Operating income
(loss)................. $1,912 $8,404 $1,341 $(1,832) $2,573 $9,092 $1,503 $(2,148)
</TABLE>
Gross profit percentage for all quarters of fiscal 1997 increased from the
comparable quarters in fiscal 1996 due to a shift to higher margin products
and less discounting at point-of-sale purchases. The increase in gross profit
percentage in the fourth quarter of both fiscal years is primarily due to
higher than anticipated rebates received on purchases from suppliers.
Warehousing, selling and administrative expenses as a percentage of net sales
increased in the fiscal quarters ending August 31, 1996 and November 30, 1996
as compared to the corresponding quarters in the previous year due to an
increase in freight costs and the addition of sales associates.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated historical operating
information for the Company, as a percentage of total sales, for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28 OR 29,
----------------------
1995 1996 1997
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Cost of products sold.................................. 75.5 76.3 75.4
------ ------ ------
Gross profit............................................ 24.5 23.7 24.6
Warehousing, selling and administrative expenses....... 21.4 20.4 21.2
Severance............................................... 0.0 0.4 0.0
Executive cash bonus.................................... 0.0 0.0 0.6
------ ------ ------
Operating income........................................ 3.1 2.9 2.8
Interest expense, net.................................. 1.5 1.4 1.0
Other income (expense)................................. 0.1 (0.1) (0.4)
------ ------ ------
Income before income taxes.............................. 1.7 1.4 1.4
Provision (benefit) for income taxes.................... 0.2 (0.4) (1.5)
------ ------ ------
Net income.............................................. 1.5% 1.8% 2.9%
====== ====== ======
</TABLE>
YEAR ENDED FEBRUARY 28, 1997 COMPARED TO YEAR ENDED FEBRUARY 29, 1996
Net Sales. Net sales during the year ended February 28, 1997 increased 13.2%
to $378.7 million from $334.5 million during the previous year. Excluding the
effect of acquisitions, net sales in the year ended February 28, 1997
increased 8.1% to $361.7 million from $334.5 million during the previous year.
All product lines shared in the sales increase.
Gross Profit. Gross profit during the year ended February 28, 1997 increased
17.6% to $93.2 million from $79.2 million during the previous year. Excluding
the effect of acquisitions, gross profit in the year ended February 28, 1997
increased 12.1% from the previous year. The gross profit percentage increased
to 24.6% during the year ended February 28, 1997 as compared to 23.7% during
the previous year. The increase was a combination of the aforementioned sales
increase, a shift in sales from lower margin lines to higher margin lines,
less discounting to customers at the point-of-sale and improved terms from
suppliers.
Warehousing, Selling and Administrative Expenses. Warehousing, selling and
administrative expenses during the year ended February 28, 1997 increased
18.4% to $82.2 million from $69.4 million in the previous year. Excluding the
effect of acquisitions, warehousing, selling and administrative expenses in
the year ended February 28, 1997 increased 11.8% from the previous year. In
1997, such expenses included a non-recurring charge of $2.2 million for a one-
time executive cash bonus. In 1996, such expenses included a charge of $1.2
million for severance related to the replacement of the former Chief Executive
Officer of the Company. Excluding the effect of acquisitions and the non-
recurring charges, warehousing, selling and administrative expenses in the
year ended February 28, 1997 increased 8.7% from the previous year. This
increase was primarily due to distribution and selling costs related to
increased sales. Salaries and wages also increased as the Company added to its
sales force. Excluding the effect of acquisitions, the Company employed, on
average, 53 additional associates in 1997 versus 1996.
23
<PAGE>
Operating Income. Operating income during the year ended February 28, 1997
increased 12.2% to $11.0 million from $9.8 million during the previous year.
Excluding the effect of acquisitions and the non-recurring charges discussed
above, operating income in the year ended February 28, 1997 increased 21.1%
from the previous year. This increase was primarily due to increased sales
volume at higher gross profit percentages.
Interest Expense. Interest expense during the year ended February 28, 1997
decreased to $3.9 million as compared to $4.7 million for the previous year.
The Company successfully completed a refinancing of its Credit Facilities,
including the addition of the Securitization Program (as defined below), in
early 1996, lowering the rate of interest that it pays on its debt. The
Securitization Program was recorded as a sale of assets; therefore,
approximately $30.5 million of accounts receivable and debt are not reflected
on the Company's balance sheet at February 28, 1997. The discount on the sale
of accounts receivable of $1.4 million for the year ended February 28, 1997
was recorded as other expense on the income statement. The Company also
refinanced its subordinated debt in early 1996, achieving lower rates of
interest in the process. The average rate of interest on all debt, including
the Securitization Program, for the year ended February 28, 1997 was 8.5% as
compared to 10.7% for the previous year.
Income Taxes. The Company recorded a benefit for income taxes for the year
ended February 28, 1997 of $5.6 million compared to a benefit of $1.4 million
during the previous year. The Company recorded a $6.5 million deferred income
tax asset in 1997 in addition to the $1.8 million deferred income tax asset
recorded in 1996 in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Realization of the deferred
income tax assets was determined to be "more likely than not." The "more
likely than not" determination was based on (i) improved operating performance
of the Company in fiscal 1997 and projected continued improvements in the
future as a result of efforts of the new senior management team; (ii) the
acquisition of Sid Harvey and other entities which are expected to add to
gross margins without a proportionate increase in warehousing, selling and
administrative expenses and (iii) other ongoing revenue enhancement and cost
reduction programs.
YEAR ENDED FEBRUARY 29, 1996 COMPARED TO YEAR ENDED FEBRUARY 28, 1995
Net Sales. Net sales during the year ended February 29, 1996 increased 3.5%
to $334.5 million from $323.2 million during the previous year. In 1996 the
Company completed the closure of its unprofitable branches and turned its
focus to increasing Company revenues. Net sales for branches that were open at
the beginning and end of both years increased 4.7%.
A net sales increase of 8.7% was generated in the HVAC equipment segment
which offset flat revenue growth in the refrigeration segment and a decline in
refrigerant revenues of 7.3%. Net sales of supplementary parts and components
increased 7.3% as the Company increased the level of this type of product
stocked at the branches in 1996.
Gross Profit. Gross profit during the year ended February 29, 1996 decreased
to $79.2 million from $79.3 million during the previous year. The shift of net
sales into a higher mix of HVAC equipment, which typically has lower gross
profit margins than refrigeration equipment, put pressure on gross profits.
The gross profit percentage declined to 23.7% during the year ended February
29, 1996 as compared to 24.5% during the previous year.
Warehousing, Selling and Administrative Expenses. Warehousing, selling and
administrative expenses during the year ended February 29, 1996 increased 0.2%
to $69.4 million from $69.2 million during the previous year. In 1996, such
expenses included a non-recurring charge of $1.2 million for severance related
to the replacement of the former Chief Executive Officer of the Company. Net
of the non-recurring charge, expenses decreased $1.1 million. The decrease was
primarily due to efficiencies realized through the consolidation of management
information systems and centralization of administrative functions completed
in May 1995.
24
<PAGE>
Operating Income. Operating income during the year ended February 29, 1996
decreased to $9.8 million from $10.0 million during the previous fiscal year.
In 1996, operating income included a non-recurring charge of $1.2 million as
discussed above. Excluding the effect of such charge, operating income
increased 10.3% to $11.1 million during fiscal 1996, and the Company's
operating margin increased to 3.3% as compared to 3.1% during the previous
year.
Interest Expense. Interest expense during the year ended February 29, 1996
decreased to $4.7 million from $4.8 million during the previous year. Average
borrowings declined by $2.2 million during that period. In March 1995, the
Company negotiated a reduction in the interest rate on the Credit Facilities
and achieved lower rates of interest to offset the 1.2% increase in the prime
rate during this period. The Credit Facilities were used to pay down some of
the higher rate subordinated debt.
Income Taxes. The Company recorded a benefit for income taxes for the year
ended February 29, 1996 of $1.4 million compared to a provision for income
taxes of $575,000 during the previous year. The Company recorded a $1.8
million deferred income tax asset in 1996 in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes."
Realization of the deferred income tax asset was determined to be "more likely
than not." The "more likely than not" determination was based on improved
operations, projections of continued improvements in operating performance in
future years and the fact that the alternative minimum tax credit carryforward
(which was the only portion of the deferred income tax asset recognized in
1996) can be carried forward indefinitely.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from seasonal working capital
requirements, capital expenditures, interest and principal payment obligations
and acquisitions. The Company has historically met its liquidity and capital
investment needs with internally generated funds and borrowings under its
Credit Facilities. For the year ended February 28, 1997, cash from operating
activities was $35.3 million compared to cash from operating activities of
$4.5 million for the year ended February 29, 1996. The increase in cash flows
from operating activities was primarily due to the sale of a substantial
portion of the Company's accounts receivable under the Securitization Program.
Net cash used in investing activities was $28.6 million for the year ended
February 28, 1997, compared to $1.2 million for the year ended February 29,
1996. The increase in cash used in investing activities was primarily due to
the acquisition of the net assets of Sid Harvey and Chase and (to a lesser
extent) increases in capital expenditures. For the year ended February 28,
1997, cash used in financing activities was $6.7 million ($3.3 million for the
year ended February 29, 1996), reflecting the net cash effect of the financing
required for the Sid Harvey and Chase acquisitions, as well as the redemption
of preferred stock held by Generale Frigorifique SA ("GFF") and the repurchase
of treasury stock. See "Certain Transactions."
The Company's working capital decreased to $34.1 million at February 28,
1997 from $62.4 million at February 29, 1996, due principally to the sale of
the Company's accounts receivable as part of the Securitization Program.
At February 28, 1997, the Company had senior borrowings of $60.3 million
under its $100 million Credit Facilities, of which $17.1 million was unused
and available. The Company's senior indebtedness consists of $29.8 million
under the Working Capital Facility and $30.5 million under the Securitization
Program (collectively, the "Credit Facilities"). The Securitization Program is
an off-balance sheet arrangement that provides for the transfer and sale of
accounts receivable to a special purpose corporation. The weighted average
interest rate on the Credit Facilities at February 28, 1997 was 7.3%. This
rate fluctuates with the commercial paper and LIBOR rates. The Credit
Facilities expire in November 2001 and have no principal payment requirements
prior to that date. The Company intends to repay a portion of the Working
Capital Facility with the net proceeds of the Offering. See "Use of Proceeds."
Following consummation of the Offering, the Company
25
<PAGE>
expects to have available approximately $44.0 million of unused credit under
its Credit Facilities. See "Description of Certain Indebtedness."
In addition to the Credit Facilities, at February 28, 1997 the Company had
$18.6 million of indebtedness to certain members and an affiliate of the
Investor Group, all of which will be repaid from the proceeds of the Offering.
See "Use of Proceeds."
The Company's capital expenditures, excluding acquisitions, for the year
ended February 28, 1997 were $2.1 million as compared to $1.4 million for the
year ended February 29, 1996. Such capital expenditures were primarily for
branch and distribution center leasehold improvements, forklifts and delivery
vehicles and computer equipment and software. Prior to fiscal 1997, the
Company limited capital expenses while it closed certain branches. The
increase in such expenditures reflects the necessary investments in fixed
assets to position the Company for its growth plans. Capital expenditures for
fiscal 1998 are expected to total approximately $2.6 million. Substantially
all of the increase over fiscal 1997 is due to the Company's planned
investment in supply chain software and capital expenditures for newly
acquired branches.
Management believes that, following the consummation of the Offering, the
Company will have adequate resources and liquidity to meet its borrowing
obligations, fund all required capital expenditures and pursue its business
strategy for existing operations. However, the Company may require additional
funding in order to pursue significant acquisition opportunities. Future
acquisitions may be financed by bank borrowings, public offerings or private
placements of equity or debt securities or a combination of the foregoing.
Such financings may require the consent of the Company's existing lenders.
There can be no assurance that the Company will be able to obtain such funds
to finance significant future acquisitions or that the consent of its lenders
to obtain such funding will be forthcoming. Acquisitions funded by the
issuance of equity securities could result in substantial equity dilution to
the Company's then existing shareholders.
INFLATION
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the sales or operating results of the
Company. However, inflation in the future could affect the Company's operating
costs. Price changes from suppliers have historically been consistent with
inflation and have had little impact on the Company's profitability. The
Company has been able to pass supplier price increases on to its customers or,
in a case where the Company meets resistance from its customers on a price
increase, the Company has been successful in working with its suppliers to
reduce acquisition cost in order to maintain a reasonable margin on its sales.
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BUSINESS
OVERVIEW
Pameco is one of the largest distributors of HVAC systems and equipment and
refrigeration products in the United States, with predecessor corporations
dating back to 1931. The Company stocks more than 65,000 SKUs to service more
than 45,000 customers through a national network of 294 branches in 44 states
and Guam located in 76 of the top 100 SMSAs in the country. The Company's
products include a complete range of central air conditioners, heat pumps,
furnaces and parts and supplies for the residential market, and condensing
units, compressors, evaporators, valves, walk-in coolers and ice machines for
the commercial market. In fiscal 1997, the Company's HVAC business generated
approximately 57.0% of its revenues, while the refrigeration business
generated the balance. In fiscal 1997, Pameco derived over 80.0% of its
revenues from the repair and replacement market, which is higher margin and
less cyclical than the new construction market due to end-users' needs for
immediate service and expert technical advice. The new construction market
generated the balance of Pameco's revenues. Management believes that Pameco is
one of a small number of companies in the United States which offers a
complete line of HVAC and refrigeration products on a significant scale on a
nationwide basis.
Pameco attributes its leadership position in the HVAC and refrigeration
distribution industries primarily to its operating philosophy. The Company
emphasizes personalized customer service and convenient "one-stop" shopping to
meet each customer's total needs at the local and national level. The
Company's technical service representatives, who provide customers with
technical advice in diagnosing problems and recommending solutions, are an
essential element of the Company's customer service. Pameco operates under a
centralized management structure and offers substantial incentive compensation
to its executive officers and division and branch managers. Additionally, the
Company believes that its size, its financial resources and its position as a
national distributor of HVAC and refrigeration products allow it to provide
superior customer service by offering immediate access to a complete product
line of equipment, parts and supplies through its 294 branches and six
regional distribution centers.
The Company's strategic objective is to continue to grow profitably in both
existing and new markets through the acquisition of branches and the opening
of new branches, as well as through increasing sales and profitability at
existing branches. The Company began an active acquisition program in 1996 to
capitalize on consolidation opportunities presented by the substantial size
and highly fragmented ownership structure of the HVAC and refrigeration
markets. Management believes Pameco is well-positioned to take advantage of
this fragmentation given the Company's breadth of product offerings, its
national presence and its proven ability to acquire and integrate new
branches, as demonstrated by its recent acquisitions. The Company's
acquisition strategy is to acquire profitable distribution businesses with
well-developed market positions and desirable supplier franchises. The Company
has focused and will continue to focus principally on acquisitions in
geographic areas not currently served by the Company, with the goal of
achieving greater geographic diversification and adding product lines,
customers and associates. Pameco will also pursue opportunities to strengthen
its position in existing markets by acquiring new branches within existing
geographic markets.
THE INDUSTRY
Based upon an industry report, management estimates that sales in the
residential and light commercial heating and cooling equipment and commercial
refrigeration markets (excluding product markets in which the Company does not
compete) totaled approximately $8.1 billion and $2.8 billion, respectively, in
1996. The combined $10.9 billion industry includes equipment, parts and
supplies distributed by wholesalers and by OEMs' captive distribution arms,
but excludes HVAC systems sold for use in large commercial projects and
refrigeration products sold in the residential market. Companies engaging in
the HVAC and refrigeration repair and replacement markets sell their products
primarily through local branches for their customers' convenience and timely
access to products. Management estimates that there are 8,100 HVAC and
refrigeration distributors in the
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United States operating from approximately 11,000 locations nationwide.
Management believes that a significant percentage of these distributors are
small, owner-operated businesses operating in single geographic areas and
providing a more limited range of products and services. Based upon the
industry report and the Company's fiscal 1997 revenues, management estimates
that Pameco's cumulative U.S. market share in its industry sectors is between
three and four percent and that no independent distributor has a significantly
greater share of this combined market on a nationwide basis.
Management believes that the fragmentation of its market stems from several
factors. First, manufacturers have historically limited their distributors'
distribution rights, including those granted to Pameco, to selected geographic
areas. For example, until recently, no major HVAC or refrigeration product
manufacturer had allowed Pameco to carry its product lines throughout the
United States. Second, customers prefer doing business at branch locations
within a 20-minute commute (five to 10 miles) of their job sites. This
preference limits the geographic area that a particular branch can support.
Finally, distributors typically do not stock all HVAC and refrigeration
products at the branch level; instead, each maintains an inventory of the most
frequently purchased SKUs. If a particular distributor (such as Pameco) does
not stock an infrequently purchased item required immediately by a particular
customer, that customer may conduct business with one of the distributor's
competitors. See"--Distribution Centers and Branch Operations."
Given the fragmentation of the market, management believes that the HVAC and
refrigeration distribution industry is well-positioned for consolidation. In
particular, management believes that many of the smaller distributors in its
industry are finding it increasingly difficult to compete in the current
market because they generally lack the financial resources of larger entities
and thus are unable to offer broad product lines and multiple brands and may
not possess sophisticated inventory management and control systems necessary
to operate multiple branches effectively or the ability to invest significant
resources in the information technology necessary to improve inventory flow.
In addition to the trend toward consolidation, management believes other
important trends within the industry include: (i) an increased presence of
large customer buying groups, forcing a competitive bidding process, while
creating opportunities to sell to new and large national accounts; (ii) the
increased importance of immediate availability of products; (iii) the attempt
by many of the smaller distributors to identify exit strategies for their
business and (iv) the proliferation of products and parts.
HVAC and refrigeration systems share many of the same characteristics,
including related markets, similar service requirements, including the need
for immediate availability of parts and supplies, common parts (such as
compressors) and often the same customers. According to Pameco's customer
surveys, most of the Company's customers provide both HVAC and refrigeration
repair and replacement services. Both HVAC and refrigeration customers also
require expert technical assistance in diagnosing problems and conceiving
solutions.
HEATING, VENTILATION AND AIR CONDITIONING
Based upon an industry report which provides data for the entire HVAC
industry and its subcomponents, management estimates that sales in the
residential heating and cooling equipment industry totaled approximately $8.1
billion in 1996 (after excluding product markets in which the Company does not
compete) and that sales in this market have been growing at an annual rate of
approximately seven to eight percent and management estimates that demand will
increase approximately five to six percent annually through the year 2001.
This growth was driven primarily by accelerated replacement demand, due to an
aging stock of existing homes which have antiquated heating and cooling
systems, aftermarket growth stimulated by federal efficiency standards,
increasing export demand, improved pricing stability for energy sources and
increased demand for integrated comfort air conditioning systems.
The HVAC product distribution industry is highly fragmented. Management
estimates that there are approximately 5,300 HVAC distributors in the United
States operating from 7,600 locations, most of which are smaller, local
distributors. As a result of their smaller size, many of the local or regional
distributors generally
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lack the purchasing power of larger entities, may lack the resources to offer
broad product lines and multiple brands, may not possess sophisticated
inventory management and control systems necessary to operate multiple
branches effectively and may not be able to invest significant resources in
technology which is necessary to improve inventory flow. Further, the Company
believes that a majority of independent distributors focus on a particular
size or type of customer or a particular product line. The Company believes
that the growing recognition of the high costs and operational inefficiencies
associated with purchasing HVAC products from these smaller distributors has
increased market demand for alternative methods of distribution. As one of the
largest independent HVAC wholesalers, and a leader in the movement toward
industry consolidation, management believes that Pameco is well positioned to
take advantage of these trends.
Residential and light commercial HVAC products are sold to the repair and
replacement and new construction markets. The repair and replacement market
has increased substantially over the past ten years as a result of the aging
of the installed base of HVAC products, the introduction of new energy-
efficient models and the upgrading of many existing buildings and homes to
central heating and air-conditioning. The Company anticipates the repair and
replacement market for HVAC parts and equipment will continue to expand even
further, as a large number of heating and cooling products installed in the
housing booms of the 1970s and 1980s become outdated or reach the end of their
useful lives. The typical service life for equipment such as that marketed by
the Company ranges from eight to 15 years, depending upon the type of
equipment, the volatility of local weather patterns and installation location.
In addition, management believes the growth of the repair and replacement
market for HVAC products may be spurred further by consumers' desire to
replace older systems with more technologically advanced, efficient models in
order to conserve energy and take advantage of the increasing number of
utility companies offering incentive programs to replace older equipment.
In certain markets, some manufacturers compete directly with wholesale
distributors for HVAC equipment sales. These manufacturers maintain their own
branches and a dedicated sales force to distribute HVAC equipment and parts
directly to contractors and service technicians. Manufacturer-owned branches
typically feature product offerings centered around the manufacturers'
equipment and target a particular customer base.
REFRIGERATION
Based upon an industry report, management estimates that the U.S. market for
commercial refrigeration products (excluding product markets in which the
Company does not compete) totaled approximately $2.8 billion in 1996. Based
upon the same report, which provides data for the entire refrigeration
industry and its subcomponents, management estimates that nationwide demand
for commercial refrigeration equipment will increase approximately five to six
percent annually through the year 2001. Although the commercial refrigeration
equipment industry is growing at a slower rate than the HVAC market,
refrigeration products generate higher margins due to the frequent immediate
need for repair and the technical expertise required in this sector. The
refrigeration equipment distribution industry is a mature market, consisting
of a large number of repeat purchases, little product differentiation, limited
technological innovation and heavy reliance upon suppliers and distributors.
Demand for commercial refrigeration equipment derives from a variety of
sources, including food and beverage services and various medical storage
operations.
Sales of new refrigeration equipment are typically made by OEMs through
their dedicated sales forces. Sales in the repair and replacement market are
typically made by wholesalers and distributors, which have the ability to
deliver a wide variety of products on an immediate basis. In certain
situations, OEMs have determined that independent distributors can better
service the needs of their small and local customer base. In these instances,
OEMs have worked with wholesalers to establish programs that enable
wholesalers to profitably address the needs of these customers. Other
manufacturers continue to maintain their own sales force.
While normal replacement of aging equipment and new commercial construction
activity principally determine the sales of new refrigeration equipment,
increased demand for refrigeration products could also be driven by end-users'
desire to replace equipment containing chlorofluorocarbons ("CFC"), remodeling
due to
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upgrades and the sale of new specialty applications. Regulations established
at the Montreal Protocol in 1992 required the phase-out of CFC refrigerant
products by 1995. Accordingly, management believes that a significant portion
of the installed commercial refrigeration systems in the United States are
CFC-based and will have to be replaced or retrofitted by systems which use
non-CFC refrigerants over the next two decades. Thus, management believes
demand for replacement parts and supplies should remain strong for the near-
to medium-term, regardless of economic conditions.
Repair, replacement and maintenance of refrigeration systems depends to a
large extent on their use and the systems' "mean time between failures"
("MTBF"). As a result of improvements in design and production, the MTBF for
many new models has been extended by one to two years. However, the large
installed base in the United States requires extensive service and repair.
Many of the systems currently in place were installed during the construction
booms of the 1970s and 1980s; consequently, these systems are not likely to be
completely replaced for some period. Instead, these systems will require
regularly scheduled maintenance and repair, where margins are higher. Unlike
the demand for HVAC systems, which is seasonal in nature, sales of
refrigeration replacement parts and equipment tend not to be influenced
significantly by seasonal fluctuations, due to the perishable nature of the
goods being stored.
While the commercial refrigeration equipment market is expected to grow at a
five percent annual rate, the market for refrigerants is expected to remain
flat in volume terms and to decline in dollar terms, due to recent
environmental initiatives regarding the production and use of CFCs. See "--
Government Regulations and Environmental Matters." Nevertheless, as discussed
above, the broad decline in CFC-based product demand is expected to be
partially offset by an expansion of the market for non-chlorine based
fluorochemicals as manufacturers and customers replace older, CFC-based
equipment and refrigerants with new non-CFC alternatives.
BUSINESS STRATEGY
The Company has invested considerable time and resources building its
national reputation and leveraging the goodwill of local branches that the
Company has developed or acquired. The Company has recently hired a new Chief
Executive Officer and four highly qualified senior managers in sales,
operations, logistics and management information systems to assist in the
implementation of the Company's operating strategy. The Company is pursuing
the following strategy to enhance growth and increase profitability:
Expansion by acquisition. The Company launched a targeted acquisition
strategy in 1996 as a consolidator in the HVAC and refrigeration distribution
industries. In the past 12 months, the Company has acquired 60 branches in 11
states, increasing the total number of its branches by over 20.0%. Pameco is
able to maximize its return on investment in new branches and obtain
incremental revenues and operating income with minimal incremental
administrative expenses, due to economies of scale made possible by the
Company's prior investment in its sales, operations, logistics and management
information systems infrastructure. Further, by geographically diversifying
its sources of revenue, management believes the Company is less susceptible to
economic slowdowns or adverse weather conditions which may occur in particular
regions of the country.
The Company's specific consolidation strategy is to acquire profitable
distribution businesses with well-developed market positions and supplier
franchises. Acquisitions can generally be categorized as new market
acquisitions or fill-in acquisitions. New market acquisitions represent the
entry into new geographic markets for the Company or the addition of new
product lines, or both. Fill-in acquisitions generally represent new branches
within the Company's geographic markets. The Company has focused primarily on
new market acquisitions, with the goal of achieving greater geographic
diversification, adding product lines, increasing sales to the repair and
replacement market (which tends to be less cyclical than the new construction
market), adding customers and associates and developing additional
opportunities for fill-in acquisitions and new branch openings. In particular,
the Company intends to expand geographically within the top 100 SMSAs.
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The Company believes acquisitions increase its earnings more effectively
than expansion by opening new branches due to the acquisition of existing
customers and trained associates. The Company believes it can increase the
sales, profitability and asset productivity of acquired branches by converting
them to its business model. Following consummation of acquisitions, the
Company generally begins to eliminate redundant product lines, conform
inventory practices to the Company's strategy, centralize administrative
functions and install the Company's management information systems. In this
regard, the Company's senior management has significant experience in
integrating acquired businesses into a nationwide business.
Emphasis on "one-stop" shopping and immediate product and service
availability. Management believes that Pameco provides added value to its
customers by providing superior customer service and immediate access to a
complete line of industry-recognized brand names and private label equipment,
parts and supplies from numerous manufacturers through its branches and
distribution centers. The Company stocks over 65,000 SKUs at its branches and
distribution centers and offers customers access to over two million SKUs. In
order to provide customers immediate access to products, the Company stocks
inventory representing over 75.0% of its sales at its branches. Pameco
believes its ability to provide immediate access to a wide range of products,
particularly in the refrigeration business, where equipment repair is often
time-sensitive, has helped the Company to establish a reputation as a "one-
stop" shop for HVAC and refrigeration products. In addition, Pameco provides
its customers with assistance in making intelligent purchases through the
Company's well-trained technical service representatives and counter
personnel. Management believes that its extensive product offerings and
knowledgeable associates help maintain an extensive and loyal customer base.
Pursue regional and national customers. The Company is focused on
opportunities to serve existing and prospective customers on a multi-regional
or national basis, which it believes represents a significant growth
opportunity. In particular, the Company believes that its nationwide coverage
and broad product lines enable it to provide multi-regional and national
accounts with consistent service, greater purchasing leverage, improved
inventory management and centralized billing. This strategy is designed to
complement the Company's established relationships with its local and regional
customers. Management believes the new ThermalZone(TM) private label line of
HVAC equipment and parts, which Pameco introduced in September 1996 and which
is currently available in 47 states, will further increase the Company's
national account opportunities. The Company believes that a nationally
available, standardized HVAC product line will provide large accounts with
greater consistency in price, availability and quality because these accounts
will be able to purchase one uniform product line nationwide instead of
purchasing a number of different product lines from different suppliers.
The Company has also focused on customer awareness as part of its operating
strategy to better serve customers at the local, regional and national levels.
By improving its knowledge of customer needs, the Company is better positioned
to anticipate product demands at specific times. Moreover, most customers
historically have not focused on consolidating their own purchasing efforts
until presented with specific proposals. By educating its customers on the
benefits of consolidation, Pameco has been able to expand the scope of many of
its accounts to a regional or national level. These initiatives, combined with
the Company's national sales capability, differentiate the Company from most
of its competitors, many of which are unprepared to service large regional or
national accounts.
Continued focus on higher margin repair and replacement market. The Company
continues to focus on the higher margin repair and replacement market, from
which Pameco derived over 80.0% of its revenues in fiscal 1997. The repair and
replacement market has increased substantially over the past ten years as a
result of the aging of the installed base of HVAC products, the introduction
of new energy-efficient models and the upgrading of many existing buildings
and homes to central heating and air-conditioning. This installed product base
represents a significant market in terms of recurring revenues, as customers
are continually replacing a percentage of the installed base of equipment each
year. In the refrigeration market, by focusing sales on products used for
repairs, which typically cannot be postponed, the Company's revenues tend to
be less dependent upon national economic cycles.
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Operating improvements through supply chain and cost structure
management. Pameco will continue to invest significant resources in its
management information systems. Management believes these systems will allow
the Company to achieve improvements in inventory control and cost management,
and, together with supply chain software to be acquired later this year, will
improve the Company's supply chain strategy, as decisions relating to
purchasing, inventory management and logistics will be more effectively
coordinated. All branches are equipped with computer systems that have the
ability to monitor inventory levels to ensure timely inventory orders and to
guard against unexpected stock shortages. Management believes that improved
distribution practices should reduce the Company's cost per SKU handled and,
over time, increase the Company's inventory turns and fill rate percentages.
Margin enhancement focus. The Company is currently implementing several
measures in an effort to enhance its margins and reduce transaction costs.
These measures include system-related pricing enhancements, such as pricing
discipline through the limitation of discounts at the point-of-sale, and
improved performance from underperforming branches through internal
benchmarking. Additionally, the Company believes it will realize efficiencies
in cost control through the Company's management information system and
logistics network, as well as through improved supply chain dynamics as
described in the immediately preceding paragraph.
PRODUCTS
HEATING, VENTILATION AND AIR CONDITIONING
Pameco generated approximately 57.0% of its revenues in fiscal 1997 from
distributing and wholesaling HVAC equipment, parts and supplies. The Company
distributes a complete range of central air conditioners, heat pumps,
combination gas and electric units, packaged terminal air conditioners and
gas, electric and oil furnaces for the residential and light commercial
markets. Pameco's HVAC systems are suitable for use in multi-family
residences, single family homes, hotels, hospitals, schools, stores and other
residential and light commercial buildings. The Company seeks to provide every
product a contractor generally would require in order to install or repair a
residential or light commercial HVAC system. In fiscal 1997, more than 80.0%
of the Company's HVAC revenues were derived from sales of replacement, repair
and maintenance parts and supplies. The Company also intends to expand sales
of its new ThermalZone(TM) private label line of HVAC equipment and parts,
which it introduced in September 1996. Management believes the ThermalZone(TM)
line will further increase national account opportunities, because it provides
large accounts with greater consistency in product, price, availability and
quality.
In fiscal 1997, the Company generated over 70.0% of its HVAC revenues from
sales of products to contractors working on residences. Due to the similarity
of heating and cooling systems for houses and small commercial enterprises,
such as convenience and other strip center stores, restaurants and selected
office buildings, the Company has been able to diversify its end-user base.
The Company currently faces little competition from home centers, hardware
stores or direct mail order catalogue businesses which cater to this market,
due to the extensive number of required parts, licensing requirements for
installers of HVAC equipment and the limited ability of these entities to
provide technical service assistance with more complex systems.
REFRIGERATION
Pameco generated approximately 43.0% of its revenues in fiscal 1997 from
selling parts, systems and supplies for use in commercial refrigeration
systems. Pameco offers all of the necessary components of a new system,
including condensing units, compressors, evaporators, valves, regulators,
tubing, copper pipes, walk-in coolers and refrigerant. The Company also
provides valuable technical advice to customers through its technical service
representatives. This expertise is especially important in the refrigeration
industry, where specialized knowledge is more significant to the customer. In
addition, products may spoil if repairs are not performed quickly and
properly.
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More than 80.0% of the Company's refrigeration revenues in fiscal 1997 were
generated from repair and replacement applications. Slightly more than half of
the Company's revenues in this segment are generated from distribution of
replacement compressors for use by grocery stores, convenience stores,
restaurants and other similar commercial enterprises. Given the change in
refrigeration products, new technology and installed product obsolescence,
much of this demand results from replacement of existing systems, and
therefore it remains fairly constant. However, Pameco has also experienced
some additional growth in other segments, as grocery and convenience stores
remodel to address the phase-out of CFC-based refrigerant products mandated by
recent government regulations. See "--Government Regulations and Environmental
Matters."
DISTRIBUTION CENTERS AND BRANCH OPERATIONS
The Company currently operates six regional distribution centers located in
Denver, Colorado; Houston, Texas; Louisville, Kentucky; Orlando, Florida;
Pennsauken, New Jersey and Stockton, California. The Louisville, Kentucky
center, which is located in close proximity to United Parcel Service's main
distribution hub, also serves as a national distribution center for slower
moving SKUs. The strategic location of these centers was determined based upon
an extensive analysis of sales and branch concentrations, transportation
routes, supplier locations and personnel considerations. The Company's
distribution centers contain an aggregate of 600,000 square feet of storage
space.
Substantially all of the Company's sales originate from its 294 branches,
which are located in 44 states and Guam. The following table lists the number
of branches within each region of the country and the major SMSAs served
within that region as of April 29, 1997:
<TABLE>
<CAPTION>
REGION MAJOR SMSAS BRANCHES
<S> <C> <C>
Southern................ Atlanta, Miami, Orlando, Tampa 107
Northcentral............ Boston, Chicago, Detroit, New York, Philadelphia, Washington, D.C. 72
Southwestern............ Austin, Houston, Phoenix, San Antonio 60
Western................. Honolulu, Los Angeles, San Francisco, Seattle 55
</TABLE>
Operations and distribution personnel monitor each distribution center and
branch's inventory levels and mix based upon historical and estimated sales
patterns and work closely with Pameco's sales personnel to determine which
types of products and corresponding brands are most likely to sell in a
particular area. Each branch typically maintains an inventory of between 3,000
and 6,000 of the most frequently purchased SKUs in that region of the country,
known in the industry as "A" items. In addition, the Company stocks up to
65,000 SKUs at its central or regional distribution centers, which can be
delivered on a next-day basis. Further, Pameco has access to over two million
slower moving or infrequently purchased SKUs which generally are not required
on an immediate basis.
Pameco manages its inventory to mirror the seasonal demand for its products.
Given the nature of HVAC systems, the sale and distribution of products tends
to be dependent upon seasonal conditions. Also, while a particular region may
have the need for both air conditioning and heating systems, the use of each
will vary dramatically by area of the country, with different failure rates
and average periods for repair. The stress that many of these systems undergo
during periods of temperature extremes and volatile weather causes failures
and leads to increased repair and replacements. In addition, the types of
heating used (gas, electric or oil) also varies considerably by region. The
Company caters to multiple systems across the country through its distribution
management systems.
Each branch is operated under the Pameco tradename, although many acquired
branches use the Pameco name in conjunction with their original name in order
to maintain customer relationships and local name recognition. Each branch has
between 3,000 and 20,000 square feet of space, with approximately 80% of that
space used for inventory storage. The remaining square footage is used to
merchandise the products distributed
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through the branch. The Company typically locates its branches with convenient
access to highways servicing a large number of contractors and other
suppliers.
SUPPLIERS AND CUSTOMERS
SUPPLIERS
The Company's size and stature in the HVAC and refrigeration industries, as
well as its strong and long-standing supplier relationships, enable the
Company to obtain favorable terms from its suppliers. Additionally, while
suppliers have traditionally resisted granting distribution rights on a
national level, due to the Company's size and growth through recent
acquisitions, Pameco has recently been granted nationwide distribution rights
for certain product lines. Management believes that as the Company continues
to grow additional suppliers may grant the Company broader distribution
rights.
The Company believes that it has good relationships with its suppliers and
that these relationships have been strengthened by the Company's recent
acquisitions. However, a significant portion of the Company's distribution
arrangements with its suppliers are oral. Further, many of these distribution
rights may be terminated by the supplier immediately or upon short notice.
During fiscal 1997, the Company purchased approximately $305.0 million of
equipment for resale, of which approximately 59.0% was obtained from its top
five suppliers, while the 25 largest suppliers accounted for approximately
87.0% of total purchases. No single supplier accounted for more than 19.0% of
the Company's total purchases.
CUSTOMERS
The Company currently serves over 45,000 customers, with no single customer
accounting for more than two percent of the Company's total sales and with the
top ten customers representing less than seven percent of total sales in
fiscal 1997. Management believes that Pameco's close relationship with its
customers is as critical to its success as parts availability and competitive
pricing. Consequently, Pameco has gone to great lengths to maintain and
enhance these relationships. A customer survey conducted by Pameco in the
spring of 1996 identified the needs of the current customer base. Based on
this survey, in addition to parts availability and selection, customers ranked
trustworthiness, relationship with store staff and the staff's technical
knowledge as key determinants in where they conduct business. Price often may
be of secondary importance.
MARKETING AND SALES
Historically, Pameco had not employed a consistent marketing and sales
strategy. Since the spring of 1996, however, the Company has employed a
proactive approach to customer relationships in order to facilitate growth at
the local, regional and national level. Management believes this new approach
is responsible in part for the increase in revenues in fiscal 1997 over fiscal
1996. The Company's focused marketing and sales approach includes the
following strategies:
The Company attempts to build on its long-lasting relationships with
customers at the local and regional levels in order to expand existing
business relationships. The Company's national account sales personnel call on
the corporate headquarters of multi-regional and national firms that are
already customers on the local level. The Company believes this approach is
attractive to national accounts because it provides these customers with
simplified billing and pricing, while allowing their local representatives to
continue to receive a high level of service at the Company's local branches.
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The Company recently began placing specific emphasis on expanding to a
national level its sales to large local and/or multi-branch customers that
have minimum annual purchases of $100,000, a segment representing
approximately 12.0% of Pameco's annual revenues, through development of the
Company's "Key Account" program. In calendar 1996, Key Accounts generated
$45.6 million of revenue for the Company. While these Key Accounts, such as
certain national supermarket chains, tend to place greater emphasis on
service, consistency and price considerations than do local customers, most
historically had not focused on consolidating their own purchasing efforts
until the Company presented them with specific proposals. The Company's
representatives market the benefits of consistent service, greater purchasing
leverage, improved inventory management and centralized billing through the
expansion of existing accounts. The Company believes that these initiatives,
combined with the Company's national sales capability, differentiate the
Company from most of its competitors, many of which do not have the national
presence to service large multi-regional and national accounts.
The Company believes that a nationally available standardized HVAC product
line provides an additional method for Pameco to target national accounts and
provide them with uniform price, availability and quality. As a result of the
Company's ThermalZone(TM) arrangement, management believes that Pameco is the
only independent distributor with effective national rights (in 47 states) to
sell a particular branded product of air conditioning equipment. Since its
introduction in September 1996, the Company has seen considerable volume in
ThermalZone(TM) products, with little reduction in sales of its other product
offerings. Management believes that this development, in conjunction with the
Company's recent branch acquisitions, solidifies Pameco's position as a
leading distributor in the HVAC industry. The Company is exploring
opportunities for a similar private label arrangement for refrigeration
products.
On the local level, the Company employs approximately 1,000 sales and
service-related associates in order to market and sell effectively to its
45,000 customers. Pameco supports these selling efforts with external
advertising and promotional expenditures of approximately $3.0 million per
year. For example, in March 1997, Pameco began a telemarketing program, which
includes pre-approved credit lines, promotional discounts and a follow-up
contact with existing and potential customers, to enhance its relationship
with its existing customers and attract new customers. The Company also
promotes its services at the local level primarily in telephone directories,
as well as by direct mail and advertising in newspapers and on local
television and radio. Each branch manager determines the frequency and type of
advertising in the local market. In addition to its principal marketing
methods, the Company is producing an Internet web page that is expected to
describe the Company's branches, product lines and equipment available for
sale and allow customers to order products without visiting a branch.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems are instrumental in allowing
Pameco to lower costs, accelerate growth, increase market share and otherwise
position the Company as a leader in its HVAC and refrigeration businesses. The
Company's systems support its three main types of operations: headquarters,
distribution centers and branches. Each of these operations are linked
together through a combination of wide and local area networks.
Headquarters systems support the information processing needs of senior
management, the corporate office staff and regional managers, and provide
enterprise-wide consolidated information at the branch, regional, divisional
and Company levels. These systems include financial applications such as
general ledger, accounts payable, accounts receivable, inventory management
and materials management, as well as nonfinancial applications such as sales
and service support, pricing, telemarketing, electronic data interchange and
database. These systems generate daily operating control reports that provide
concise and timely measurement of key aspects of the business, enabling
management to achieve cost savings, deliver superior customer service and
manage the Company's operations centrally.
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<PAGE>
Distribution centers are connected to the Company's headquarters'
information systems through dedicated telephone lines and are on-line to key
applications systems such as materials management and inventory. Real-time
connectivity to this information enables each distribution center access to
the most timely management and control information for purchasing, inventory,
distribution, stock balancing, order fulfillment and other measurements of
performance.
Branches utilize a point-of-sale ("POS") system that operates on a local
area network in each facility. The POS system includes sales/order processing,
customer management, accounts receivable, inventory management, distribution
and pricing support. The POS system communicates daily with headquarters'
systems to transfer customer, sales and inventory transactions and receive
file and data updates from headquarters and distribution centers.
To support the Company's acquisition strategy, the Company has developed a
methodology to facilitate the timely integration of acquired branches into its
MIS environment and communications network. For MIS, the acquisition process
begins with planning at the time the acquisition target is identified,
assessing and determining the requirements for conversion to the POS and other
financial systems. The result of this process is the timely, complete and
accurate conversion of the acquired branches' data, and the speedy
implementation of store/POS information systems and applications.
The Company intends to implement major improvements to its headquarters
systems and communications networks. The Company also intends to purchase new
supply chain software that will upgrade current inventory and materials
management software, provide greater connectivity with suppliers and
customers, and further automate inventory, warehouse and materials management
functions. Additionally, certain improvements in telecommunications are being
implemented that will enable faster and less expensive communications between
headquarters, distribution centers and branches. See "Risk Factors--Dependence
on Information Systems."
COMPETITION
The Company's business is highly competitive and fragmented. The Company
competes with a wide variety of traditional HVAC and refrigeration product
distributors in each of the Company's geographic markets. Most such
distributors are small enterprises maintaining between one and ten branches
and selling to customers in a limited geographic area. The Company also
competes to some extent with the manufacturers of HVAC and refrigeration
products, although management believes these manufacturers cannot compete
effectively with the broad product lines and additional services offered by
distributors, such as the Company. The primary factors of competition within
the Company's industries include breadth and quality of product lines
distributed, ability to fill orders promptly, technical knowledge of sales
personnel and, in certain product lines, service capability and price. In
general, the Company believes that national and multi-regional wholesalers,
such as the Company, enjoy substantial competitive advantages over small,
independent wholesalers that cannot afford to maintain Pameco's comprehensive
product offerings. The Company believes that its ability to compete
effectively is dependent upon its ability to respond to the needs of its
customers through quality service and product availability.
Management believes the Company's geographic diversity, service
capabilities, marketing focus, product availability and national scale compare
favorably to those of its significant competitors. However, competitive
pressures or other factors could cause the Company's products or services to
lose market acceptance or result in significant price erosion, all of which
would have a material adverse effect on the Company's business and results of
operations. See "Risk Factors--Substantial Competition."
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. These
36
<PAGE>
include laws and regulations implementing the Clean Air Act, relating to
minimum energy efficiency standards of HVAC systems and the production,
servicing and disposal of certain ozone depleting refrigerants used in such
systems, including those established at the Montreal Protocol in 1992
concerning the phase-out of CFC-based refrigerants. Management believes that
the Company is in substantial compliance with all applicable federal, state
and local provisions relating to the protection of the environment. The
Company is also subject to regulations concerning the transport of hazardous
materials, including regulations adopted pursuant to the Motor Carrier Safety
Act of 1990.
HEADQUARTERS AND PROPERTIES
The Company's corporate headquarters are located in Norcross, Georgia and
are occupied pursuant to a lease that expires in July 2003. The Company
believes that its current office space is sufficient to meet its present needs
and does not anticipate any difficulty securing additional space, as needed,
on terms acceptable to the Company.
Pameco leases all six of its distribution centers pursuant to agreements
expiring from five to 15 years. See "--Distribution Centers and Branch
Operations." The Company operates 294 branches in 44 states and Guam. Pameco
owns five of its branches and leases the other 289. The Company's branch
leases have terms expiring from one to seven years, with its leases typically
having renewal options. Management believes that none of Pameco's leased
facilities, individually, is material to the Company's operations.
TRADEMARKS
The tradenames "Pameco," "ThermalZone" and "Gift of Warmth" and related
design logos are actively used and are significant to the Company's business.
All of these marks have been registered on the Principal Register of the
United States Patent and Trademark Office.
INSURANCE
Pameco currently maintains the types and amounts of insurance coverage that
it considers appropriate for a company in its business. While management
believes that the Company's insurance coverage is adequate, if the Company
were held liable for amounts exceeding the limits of its insurance coverage or
for claims outside of the scope of its insurance coverage, the Company's
business and results of operations could be materially and adversely affected.
ASSOCIATES
As of February 28, 1997, Pameco employed approximately 1,300 associates, 170
of whom were employed primarily in management and administration, 90 in
regional distribution centers and 1,040 in sales and field operations. Pameco
expects that it will increase the number of its associates as it opens
additional branches and otherwise expands its business. The Company's
associates are not subject to any material collective bargaining agreements,
and management believes that its relationship with its associates is good.
LEGAL PROCEEDINGS
On November 18, 1996, United, a competitor of the Company, filed suit
against Pameco in the United States District Court for the Eastern District of
Pennsylvania claiming that Pameco had tortiously interfered with United's
alleged contract to purchase Sid Harvey's southeastern business operations
(the "Southeastern Assets"). United asserted that beginning on or about August
23, 1996, it met with Sid Harvey and thereafter negotiated an agreement
(allegedly finalized on or about October 24, 1996) to purchase the
Southeastern Assets for approximately $26.0 million and that Pameco tortiously
interfered with this alleged contract by offering
37
<PAGE>
"substantial inducements" to Sid Harvey and by itself purchasing the
Southeastern Assets. In the alternative, United claims that, should the
agreement be deemed unenforceable, Pameco tortiously interfered with United's
prospective contractual relations with Sid Harvey.
On February 18, 1997, United filed an amended complaint adding Sid Harvey as
a defendant. In the amended complaint, United claims that Sid Harvey (i)
breached its agreement to sell the Southeastern Assets to United; (ii)
committed fraud in the inducement of that alleged contract; (iii) negligently
misrepresented certain facts concerning the sale of the operations and Sid
Harvey's intention to carry out the sale of those assets and (iv) was unjustly
enriched by certain information obtained from United during the United-Sid
Harvey negotiations. Although the amended complaint does not demand specified
damages, it asserts that United should recover the "loss of its bargain,"
which United estimates to be $11.4 million. Upon consummation of the
Southeastern Assets acquisition, Pameco agreed, based on certain written
representations made by Sid Harvey about the status of its discussions with
United, to indemnify Sid Harvey against all liabilities arising out of any
action filed by United in connection with the purchase of the Southeastern
Assets. The Company believes that United's claims lack merit and intends to
defend itself vigorously in this litigation.
On July 5, 1996, three former employees filed suit against Pameco and a
Company supervisor in the Superior Court of the State of California, County of
Stanislaus, alleging various tortious acts and that the Company maintained a
hostile work environment. The suit also asserts that in permitting the alleged
harassment of the plaintiffs by its supervisor, Pameco violated the California
Fair Employment Housing Act by failing to provide a harassment free work
place. The plaintiffs have cumulatively sought $1.8 million in damages,
including $1.5 million in punitive damages, from Pameco. The Company believes
that these claims lack merit and intends to defend itself vigorously in this
litigation.
In addition, the Company is, from time to time, a party to other litigation
arising in the normal course of its business. Management believes that none of
these actions, individually or in the aggregate, will have a material adverse
effect on the Company's business and results of operations.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information regarding the directors and key employees of the Company
is set forth in the table below.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James R. Balkcom, Jr. .. 53 Chairman of the Board
Gerald V. Gurbacki...... 51 Chief Executive Officer and Director
Charles A. Sorrentino... 52 President and Chief Operating Officer
Theodore R. Kallgren.... 35 Chief Financial Officer, Vice President and Secretary
Jeffrey S. Ruege........ 42 Vice President and General Manager--HVAC
J. Christopher van Ee... 44 Vice President and General Manager--Refrigeration
Mark L. Davison......... 37 Chief Information Officer
G. Thomas Braswell, 55 Director
Jr.....................
Michael H. Bulkin....... 58 Director
Earl Dolive............. 79 Director
H. Whitney Wagner....... 41 Director
Thomas G. Weld.......... 34 Director
</TABLE>
JAMES R. BALKCOM, JR. has been a Director of the Company since February 1996
and Chairman of the Board since May 1996. Mr. Balkcom also is self-employed
with J.R. Balkcom Associates, Inc., a strategic planning consulting firm.
Prior to joining Pameco, he served from 1977 until 1995 in one or more of the
following capacities at Techsonic Industries, Inc., a manufacturer of consumer
marine electronics: Chairman, President and CEO. Mr. Balkcom has been the
Chairman of Techsonic Industries, Inc. since December 1995.
GERALD V. GURBACKI has been Chief Executive Officer of the Company since
March 1996. He has also served as a director since March 1996. Mr. Gurbacki's
last position prior to joining Pameco was as President of National Linen
Service, a subsidiary of National Service Industries, from 1987 to October
1995. Prior to serving as President, Mr. Gurbacki held several executive and
managerial positions with National Linen Service.
CHARLES A. SORRENTINO has been President and Chief Operating Officer of the
Company since June 1994. Mr. Sorrentino's last position prior to joining the
Company was as Senior Vice President of Nationwise Automotive Corp. from
January 1993 to October 1993. From 1983 to 1993, he was employed by PepsiCo as
a Subsidiary President and a Division Vice President. During his employment
with PepsiCo, Mr. Sorrentino also held a variety of other positions, including
Region Vice President. Prior to joining PepsiCo, Mr. Sorrentino was in the
HVAC industry for fourteen years with Sundstrand/Bristol Compressors.
THEODORE R. KALLGREN joined the Company in May 1988, and has been Vice
President and Chief Financial Officer of Pameco since March 1994. Mr. Kallgren
also served as Vice President of Finance of MLX Corp., an affiliate of the
Company ("MLX"), from March 1991 to March 1994, and as Secretary of MLX from
March 1994 to April 1997. Prior to joining Pameco, Mr. Kallgren was employed
by Ernst & Whinney from 1984 to 1988.
JEFFREY S. RUEGE joined the Company in March 1988, and has served as Vice
President and General Manager of HVAC Operations of Pameco since September
1996. Before assuming his current position, Mr. Ruege supervised the
development of sales, marketing, and key accounts. Prior to joining Pameco,
Mr. Ruege was employed by Rockwell International from 1979 to 1988.
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<PAGE>
J. CHRISTOPHER VAN EE joined the Company in April 1991 as Vice President of
Materials and has served as Vice President and General Manager of
Refrigeration Operations of Pameco since September 1996. Before assuming his
current position, Mr. van Ee supervised the development of Pameco's materials
procurement and distribution systems. From 1976 to 1991, Mr. Van Ee had a
variety of professional experience in production and materials management,
including positions with Trimblehouse Corporation, Ford Motor Company, Mars
Inc. and Timex.
MARK L. DAVISON has been Chief Information Officer of the Company since July
1996. Prior to joining Pameco, Mr. Davison was employed as a senior manager
with International Systems Services, a strategic planning and information
technology consulting firm, from March 1996 to June 1996, and as the Vice
President-Information Systems of National Linen Service, an integrated textile
rental company from 1990 to 1996.
G. THOMAS BRASWELL, JR. has been a Director of the Company since October
1995. Mr. Braswell is currently Vice President of Information Systems for
Genuine Parts Company, a national distributor of automotive parts, a position
he has held since 1982. Mr. Braswell has been employed by Genuine Parts
Company for 31 years.
MICHAEL H. BULKIN has been a Director of the Company since February 1996.
From 1965 to 1993, Mr. Bulkin was a Principal and Director with McKinsey &
Company, Inc. Mr. Bulkin has served as an independent consultant since 1993.
EARL DOLIVE has been a Director of the Company since 1993. Mr. Dolive
retired as Vice-Chairman of Genuine Parts Company in 1989 after 52 years of
service. Mr. Dolive was President of the National Automotive Parts Association
(NAPA) in 1970 and 1971. Mr. Dolive is also a director of Aaron Rents and
Exide Corporation and Director Emeritus of Genuine Parts Company.
H. WHITNEY WAGNER has been a Director of the Company since 1993, and has
been a Managing Director of TCR since 1983. Mr. Wagner was employed as a
Corporate Banking Officer with Chemical Bank prior to joining TCR in 1983. Mr.
Wagner is also a director of MLX, Family Bargain Corporation and Garden Ridge
Corporation.
THOMAS G. WELD has been a Director of the Company since 1994, and is
currently employed by TCR as a Managing Director, a position he has held since
June 1993. Prior to joining TCR, Mr. Weld was employed by McKinsey & Company,
Inc. from 1989 to 1993. Mr. Weld is also a director of Family Bargain
Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Audit Committee consists of Messrs. Braswell, Dolive
and Wagner. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls.
Compensation Committee. The Compensation Committee consists of Messrs.
Bulkin, Dolive and Wagner. The Compensation Committee recommends compensation
for the Company's executive officers and administers the Company's Employee
Stock Option Plans.
Strategic Planning Committee. The Strategic Planning Committee consists of
Messrs. Balkcom, Braswell, Bulkin, Gurbacki and Weld. The Strategic Planning
Committee reviews and makes recommendations regarding the Company's stated
strategic objectives.
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<PAGE>
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated
by the Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding the annual
compensation for services in all capacities to the Company for the fiscal year
ended February 28, 1997, with respect to the Company's Chief Executive Officer
and each of the Company's four other most highly compensated executive
officers (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------------
LONG TERM
COMPENSATION AWARDS;
NAME AND SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS OPTIONS (#) COMPENSATION
<S> <C> <C> <C> <C>
Gerald V. Gurbacki...... $310,512 $1,250,000(1) 515,625 $369(2)
Chief Executive Officer
and Director
Charles A. Sorrentino... 187,200 313,298(1) 6,250 --
President and Chief
Operating Officer
Theodore R. Kallgren.... 121,385 187,411(1) 9,375 --
Chief Financial
Officer, Vice President
and Secretary
J. Christopher van Ee... 129,626 117,519(1) 3,125 --
Vice President and
General Manager--
Refrigeration
Jeffrey S. Ruege........ 122,714 174,326(1) 9,375 29(2)
Vice President and
General Manager--HVAC
</TABLE>
- ---------------------
(1) Includes bonuses granted pursuant to the Company's bonus plan and a one-
time special cash bonus, which accrued in fiscal 1997, although a
percentage of the bonus may not be paid until subsequent fiscal years. See
"--Bonus Plan" and "--Special Bonuses."
(2) Represents life insurance premiums paid by the Company.
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<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table summarizes certain information regarding stock options
to purchase Class A Common Stock issued to the Named Executive Officers during
fiscal 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES PERCENT OF TOTAL ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS GRANTED EXERCISE OR STOCK PRICE APPRECIATION
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION FOR OPTION TERM(1)
GRANTED FISCAL YEAR ($/SH) DATE ------------------------------
NAME ---------- ---------------- ----------- ---------- 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Gerald V. Gurbacki...... 468,750(2) 80.3% $6.40 04/15/02 $4,357,305 $5,281,054
46,875(3) 8.0 6.40 05/05/02 437,535 532,452
Charles A. Sorrentino... 6,250(4) 1.1 8.00 08/04/01 46,626 57,420
Theodore R. Kallgren.... 9,375(4) 1.6 8.00 08/04/01 69,939 86,130
J. Christopher van Ee... 3,125(4) 0.5 8.00 08/04/01 23,313 28,710
Jeffrey S. Ruege........ 9,375(4) 1.6 8.00 08/04/01 69,939 86,130
</TABLE>
- ---------------------
(1) The dollar amounts under these columns represent the potential tangible
value, before income taxes, of each option assuming that the market price
of the Class A Common Stock appreciates in value from the fair market
value at the date of grant to the end of the option term at five percent
and ten percent annual rates and therefore are not intended to forecast
possible future appreciation, if any, of the price of the Class A Common
Stock. All grants of options have been made with exercise prices equal to
the fair market value on the date of grant.
(2) Pursuant to the terms of his Employment Agreement, Mr. Gurbacki has been
granted options under one of the Employee Stock Option Plans to purchase
468,750 shares of Class A Common Stock at a price of $6.40 per share.
These options vest periodically beginning in April 1996 through March 1,
2001, although all of these options will vest immediately upon
consummation of the Offering.
(3) Mr. Gurbacki received a separate grant of options to purchase 46,875
shares of Class A Common Stock at a price of $6.40 per share. These
options vest periodically beginning in May 1996 through March 1999,
although all of these options will vest immediately upon consummation of
the Offering.
(4) Granted pursuant to the Employee Stock Option Plan. Options have a term of
five years and vest in one-third increments annually beginning August 5,
1996.
OPTIONS EXERCISED IN LAST FISCAL YEAR; FISCAL YEAR END OPTION VALUES
No options were exercised in the fiscal year ended February 28, 1997. The
following table summarizes certain information regarding year end option
values of the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FEBRUARY 28, 1997 IN-THE-MONEY OPTIONS
(NO. OF SHARES) AT FEBRUARY 28, 1997
------------------------------------ -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Gerald V. Gurbacki...... 515,625(1) -- $3,918,750 $ --
Charles A. Sorrentino... 33,333 4,167 249,998 25,002
Theodore R. Kallgren.... 25,000 6,250 264,100 37,500
J. Christopher van Ee... 22,917 2,083 268,752 12,498
Jeffrey S. Ruege........ 25,000 6,250 276,350 37,500
</TABLE>
- ---------------------
(1) All of Mr. Gurbacki's options will become exercisable upon consummation of
the Offering.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the Compensation Committee consisted of Messrs. Balkcom,
Dolive and Wagner. In March 1997, Mr. Balkcom obtained a $600,000 loan from
the Company in connection with his purchase of an aggregate of 62,500 shares
of Common Stock at a purchase price of $9.60 per share. Mr. Wagner is a
Managing Director of TCR, an affiliate of the Company, which serves as the
Company's financial advisor. See "Certain Transactions." Commencing on March
24, 1997, Mr. Bulkin replaced Mr. Balkcom on the Compensation Committee.
COMPENSATION OF DIRECTORS
Each non-employee director, other than the directors employed by TCR,
receives an annual retainer of $10,000 as well as director's fees of $2,500
per board meeting or committee meeting attended in person, or $250 per meeting
in which they participate by telephone, and all Directors are reimbursed for
their out-of-pocket expenses incurred in connection with their service on the
Board of Directors. In addition, in fiscal 1997 the Company paid Mr. Balkcom
$50,000 to serve as the Chairman of the Board of Directors and recently agreed
to pay him $175,000 in fiscal 1998 in exchange for his agreement to devote
approximately 65.0% of his time to the Company's business. For a description
of the non-cash compensation to be paid to the non-employee Directors for
their service on the Board, see "--Stock Incentive Plans--Non-Employee
Directors Stock Option Plan." Mr. Gurbacki will receive no compensation for
his service on the Board of Directors other than reimbursement for his out-of-
pocket expenses incurred in connection with such service.
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements with certain of its
directors and officers (the "Indemnified Parties"). Under the terms of the
Indemnification Agreements, the Company is required to indemnify the
Indemnified Parties against certain liabilities arising out of their services
for the Company. The Indemnification Agreements require the Company (i) to
indemnify each Indemnified Party to the fullest extent permitted by law; (ii)
to provide coverage for each Indemnified Party under the Company's directors
and officers liability insurance policy and (iii) to advance certain expenses
incurred by an Indemnified Party. The Indemnification Agreements provide
limitations on the Indemnified Parties' rights to indemnification in certain
circumstances. To the extent that indemnification provisions contained in the
Indemnification Agreements purport to include indemnification for liabilities
arising under the Securities Act, the Company has been informed that in the
opinion of the Securities and Exchange Commission (the "Commission"), such
indemnification is contrary to public policy and therefore unenforceable.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Mr. Gurbacki as of
March 1, 1996. The employment agreement provides for a three-year term, which
is automatically extended for successive one-year terms unless either party
elects to terminate the agreement by giving written notice thereof to the
other party at least 180 days prior to the expiration of the then-current
term. The agreement provides for a base salary of $315,000 (subject to annual
review by the Board of Directors), a targeted annual bonus equal to 50% of
Mr. Gurbacki's annual salary, payable in shares of Class A Common Stock at the
discretion of the Board of Directors, and Company benefits of the type
generally provided to key executives. Effective March 1, 1997, Mr. Gurbacki's
annual base salary has been increased to $400,000 and his targeted annual
bonus for fiscal 1998 is $225,000. In addition, Mr. Gurbacki may participate
in the Company's health benefit plan, at his own expense, until age 65. The
Company can terminate Mr. Gurbacki for Cause (as defined in the employment
agreement) or for his inability to carry out his duties effectively. If
Mr. Gurbacki is terminated without Cause, then the Company must pay him
severance in an amount equal to his then current annual salary plus a pro rata
amount of his targeted bonus for the year in which he is terminated. If Mr.
Gurbacki is terminated due to a change in control
43
<PAGE>
of the Company, then he is entitled to severance in an amount equal to two
times his then current annual salary plus his targeted bonus for the year in
which he is terminated.
BONUS PLAN
The Company offers incentive bonuses to its executive officers, division
presidents, regional and branch managers and sales associates. These
associates may earn predetermined annual bonuses equal to a substantial
percentage of their base salary, based upon meeting certain performance goals
with respect to profitability, revenue growth and asset management. In fiscal
1997, the Company accrued approximately $2.0 million for bonus payments to its
associates pursuant to its bonus plan. Management believes that this program
assists the Company in attracting, retaining and motivating associates with
experience and ability.
SPECIAL BONUSES
In February 1997, the Company declared and accrued a one-time special cash
bonus to 14 of its associates in order to reward these associates for their
past efforts on behalf of the Company. The amount of the bonus is equal to the
aggregate exercise price of the stock options previously granted to each such
associate, and the bonus is payable as each associate's options become
exercisable. The aggregate amount of the special bonuses is approximately $2.2
million.
STOCK INCENTIVE PLANS
The Company has adopted two separate but virtually identical Stock Option
Plans and entered into a separate agreement for the grant of stock options to
the Chief Executive Officer (collectively, the "Plans" or individually with
respect to the stock option plans, "Plan I" and "Plan II") for the purpose of
(i) attracting and retaining senior management personnel with ability and
initiative; (ii) providing incentives to those deemed important to the success
of the Company and (iii) associating the interests of these individuals with
the interests of the Company and its shareholders through opportunities for
increased ownership of Class A Common Stock. Although all material terms of
the Plans are set forth below, the summaries of the Plans set forth below are
qualified in their entirety by reference to the text of the Plans, which have
been filed as exhibits to the Registration Statement of which this Prospectus
is a part.
THE EMPLOYEE STOCK OPTION PLANS
Administration. Each Plan is administered by the Compensation Committee.
Eligibility. Each officer and other key employee of the Company, including
an employee who is a member of the Board, is eligible to participate in the
Plans. The Compensation Committee will select the individuals who will
participate in the Plans ("Participants"); provided, however that the
Company's Chief Executive Officer has the right to grant awards under Plan I
involving up to 1,000 shares of Class A Common Stock, and shall have the same
authority and discretion as the Compensation Committee with respect to such
options.
Stock Options. Options granted under the Plans may be incentive stock
options ("ISOs") or nonqualified stock options. A stock option entitles a
Participant to purchase shares of Class A Common Stock from the Company at the
option price. Subject to certain exceptions, the option price must be paid
upon exercise in cash or cash equivalent. The option price will be fixed by
the Compensation Committee at the time the option is granted, but the price
cannot be less than the fair market value of a share of Class A Common Stock
on the date of grant in the case of an ISO. The exercise price of an ISO
granted to any Participant who is a Ten Percent Shareholder (as defined below)
may not be less than 110% of the fair market value of a share of Class A
Common Stock on the date of grant. A Participant is a Ten Percent Shareholder
if he owns, or is deemed to own, more than ten percent of the total combined
voting power of all classes of stock of the Company or a related
44
<PAGE>
entity. A Participant is deemed to own any voting stock owned (directly or
indirectly) by the Participant's spouse, brothers, sisters, ancestors and
lineal descendants. A Participant and such persons are also considered to own
proportionately any voting stock owned (directly or indirectly) by or for a
corporation, partnership, estate or trust of which the Participant or any such
person is a shareholder, partner or beneficiary. All options under Plan I
expire upon the earlier of (i) the date specified by the Compensation
Committee in any award agreement, which may not exceed five years from the
date of grant and (ii) the date of termination of the Participant's
employment. All options under Plan II expire upon the date specified by the
Compensation Committee in an award agreement, which may not exceed ten years
from the date of grant, except that options held by a Ten Percent Shareholder
may not be exercised after five years from the date of grant. If the
employment of a Participant under Plan II is terminated by the Company for
Cause (as defined in Plan II), all nonexercised options granted to the
Participant, whether vested or nonvested, shall be immediately forfeited to
the Company, and if such termination is voluntary or is by action of the
Company (except for Cause), then vested options then held which are then
exercisable shall continue to be exercisable until the earlier of one month
after the termination date or the expiration of such options, and all options
which are not then exercisable shall automatically terminate. Notwithstanding
the foregoing, upon the dissolution or liquidation of the Company, or a merger
or consolidation in which the Company is not the surviving corporation (unless
new options are substituted for the options granted hereunder or the options
granted hereunder are assumed by the surviving corporation), each outstanding
option under both Plans shall terminate, provided that each Participant shall,
in such event, have the right immediately prior to such dissolution or
liquidation, or merger or consolidation, to exercise his or her option in
whole or in part. No Participant may be granted ISOs (under all incentive
stock option plans of the Company) which are first exercisable in any calendar
year for stock having an aggregate fair market value (determined as of the
date the ISO was granted) that exceeds $100,000.
Share Authorization. All awards made under the Plans will be evidenced by
written agreements between the Company and the Participant. A maximum of
750,000 shares of Class A Common Stock may be issued under Plan I and a
maximum of 468,750 shares of Class A Common Stock may be issued under Plan II.
The share limitation and the terms of outstanding awards shall be adjusted, as
the Compensation Committee deems appropriate, in the event of a stock
dividend, stock split, combination, reclassification, recapitalization or
other similar event.
Nontransferability. Each option granted under the Plans is nontransferable
except (i) by will or by the laws of descent and distribution or (ii) under
Plan II for non-ISOs, if permitted under an Award Agreement (as defined
therein), to a member of a Participant's immediate family or to any trust,
partnership or similar vehicle for the benefit of such immediate family
member. During the lifetime of a Participant, options may only be exercised by
such Participant, other than in the case of the disability or incompetency of
a Participant.
Termination and Amendment. No option may be granted under Plan I after June
23, 2002, and under Plan II after April 1, 2006. The Compensation Committee
may amend or terminate each Plan at any time, but an amendment will not become
effective without shareholder approval if the amendment increases the number
of shares of Class A Common Stock which may be issued under the Plan, changes
the eligibility requirements or materially increases the benefits accruing to
Participants in the Plans.
If all the Investors (as defined in the Stockholders' Agreement dated March
19, 1992, among Pameco, the Investor Group, The Bank of Nova Scotia, Brian R.
Esher and certain employees of the Company, as amended (the "Stockholders'
Agreement") propose to sell all of their shares to a third party (other than
an affiliate) in an arms-length transaction, then the Investors may, at their
option, require Participants under the Plans to sell all, but not part, of the
shares owned by them to such third party on the same terms and conditions upon
which the Investors are selling their shares, subject to certain terms of the
Stockholders' Agreement. See "Certain Transactions."
In the event of the termination of a Participant's employment for any reason
(a "Termination Event"), such Participant shall be deemed to have offered for
sale to the Company all of the shares owned by such Participant
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<PAGE>
at the time of such Termination Event. The Company shall have thirty (30) days
after the date of such Termination Event to provide such Participant with
written acceptance of such offer. The Company shall also have the right to
designate a third party to purchase shares which it would otherwise be
entitled to purchase, and such third party shall be entitled to purchase any
such shares on the same terms and conditions as the Company. The purchase
price for such shares under Plan I shall be, in the case of a vested share,
the Appraised Value of such share (as defined in the Plan), and in the case of
an unvested share, the lesser of the Base Price of such share (as defined in
the Plans) or the Appraised Value of such share. The Purchase Price for such
shares under Plan II shall be the Appraised Value (as defined in the Plan).
Outstanding Awards. Pursuant to the terms of his Employment Agreement, Mr.
Gurbacki has been granted Options under Plan II to purchase 468,750 shares of
Class A Common Stock at a price of $6.40 per share. These options vest
periodically beginning in March 1996 through March 1, 2001, although all of
these options will vest immediately upon consummation of the Offering. In
addition, in May 1996, Mr. Gurbacki received a separate grant of options to
purchase 46,875 shares of Class A Common Stock at a price of $6.40 per share.
These options vest periodically beginning in May 1996 through March 1999,
although all of these options will also vest immediately upon consummation of
the Offering. On August 5, 1996, Messrs. Kallgren, Ruege, Sorrentino and van
Ee received options to purchase 9,375, 9,375, 6,250 and 3,125 shares of Class
A Common Stock, respectively, under Plan I. These options vest in one-third
increments annually beginning on August 5, 1996, and are exercisable for a
period of five years from the date of grant at a price of $8.00 per share. In
addition, since March 1, 1996, the Company has granted options under Plan I to
14 other associates covering 40,313 shares of Class A Common Stock, at
exercise prices ranging from $8.00 to $9.60 per share.
Shareholder Rights. A Participant will have no rights as a shareholder with
respect to the shares subject to his or her option until the option is
exercised.
Federal Income Taxes. No income is recognized by a Participant at the time
an option is granted. If the option is an ISO, no income will be recognized
upon the Participant's exercise of the option. Income is recognized by a
Participant when he disposes of shares acquired under an ISO. The exercise of
a nonqualified stock option generally is a taxable event that requires the
Participant to recognize, as ordinary income, the difference between the
share's fair market value and the option price.
The Company will be entitled to claim a federal income tax deduction on
account of the exercise of a nonqualified option. The amount of the deduction
is equal to the ordinary income recognized by the Participant. The Company
will not be entitled to a federal income tax deduction on account of the grant
or the exercise of an ISO. The employer may claim a federal income tax
deduction on account of certain dispositions of Class A Common Stock acquired
upon the exercise of an ISO.
THE NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Administration and Eligibility. The Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") is administered by the Compensation Committee.
Each director of the Company who is not an employee of the Company or any of
its subsidiaries and who does not own any of the outstanding capital stock of
the Company or have the right or option to acquire any such stock, other than
under the Directors' Plan (a "Qualifying Director"), is eligible to
participate in the Directors' Plan. Any person who is a Qualifying Director as
of the date of grant of an option under the Directors' Plan shall continue to
be a Qualifying Director notwithstanding that after such date such person no
longer meets the foregoing eligibility requirements.
Stock Options. Options granted under the Directors' Plan will be non-
qualified stock options. A stock option granted under the plan entitles an
eligible director to purchase shares of Class A Common Stock from the Company
at the option price. The option price must be paid upon exercise in cash or a
cash equivalent. The option price will be fixed by the Compensation Committee
at the time the option is granted, but the price cannot
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<PAGE>
be less than the fair market value of a share of Class A Common Stock on the
date of grant. All options granted under the plan shall be immediately vested,
and all options will expire upon the date specified in any award agreement by
the Compensation Committee, which may not exceed five years from the date of
grant. Notwithstanding the foregoing, upon the dissolution or liquidation of
the Company, or a merger or consolidation in which the Company is not the
surviving corporation (unless new options are substituted for the options
granted hereunder or the options granted hereunder are assumed by the
surviving corporation), each outstanding option shall terminate, provided that
each grantee shall, in such event, have the right immediately prior to such
dissolution or liquidation, or merger or consolidation, to exercise his or her
option in whole or in part.
Share Authorization. All awards made under the Directors' Plan will be
evidenced by a written agreement between the Company and an eligible director.
A maximum of 62,500 shares of Class A Common Stock may be issued under the
Directors' Plan. The share limitation and the terms of outstanding awards
shall be adjusted, as the Compensation Committee deems appropriate, in the
event of a stock dividend, stock split, combination, reclassification,
recapitalization or other similar event.
Nontransferability. Any option granted under the Directors' Plan is
nontransferable except (i) by will or by the laws of descent and distribution
or (ii) if permitted under an Award Agreement (as defined therein), to a
member of a Participant's immediate family or to any trust, partnership or
similar vehicle for the benefit of such immediate family member. During the
lifetime of a grantee, options may only be exercised by such grantee, other
than in the case of the disability or incompetency of a grantee.
Termination and Amendment. No shares of Class A Common Stock will be awarded
under the Directors' Plan after June 1, 2006. The Directors' Plan provides
that the Compensation Committee may amend or terminate the Directors' Plan at
any time, but an amendment will not become effective without shareholder
approval if the amendment increases the number of shares subject to the plan,
materially increases the benefits accruing to grantees under the plan or
changes the eligibility requirements.
If all the Investors (as defined in the Stockholders' Agreement) propose to
sell all of their shares to a third party (other than an affiliate) in an
arms-length transaction, then the Investors may, at their option, require
Participants under the Plans to sell all, but not part, of the shares owned by
them to such third party on the same terms and conditions upon which the
Investors are selling their shares, subject to certain terms of the
Stockholders' Agreement. See "Certain Transactions."
Outstanding Awards. On May 20, 1996, Messrs. Balkcom, Braswell, Bulkin and
Dolive each received options to purchase 6,250 shares of Class A Common Stock.
These options were immediately exercisable for a period of five years from the
date of grant at a price of $6.40 per share. In addition, on January 28, 1997,
Messrs. Balkcom, Braswell, Bulkin and Dolive each received options to purchase
an additional 6,250 shares of Class A Common Stock. These options were
immediately exercisable for a period of five years from the date of grant at a
price of $9.60 per share. In addition, Mr. Dolive received an option to
purchase 9,375 shares of Class A Common Stock at a price of $6.40 per share on
December 6, 1995.
Federal Income Taxes. No income is recognized by an eligible director at the
time an option is granted. The exercise of a nonqualified stock option
generally is a taxable event that requires the eligible director to recognize,
as ordinary income, the difference between the share's fair market value and
option price. The Company will be entitled to a federal income tax deduction
on account of the exercise of a nonqualified option. The amount of the
deduction is equal to the ordinary income recognized by the eligible director.
THE STOCK PURCHASE PLAN
The Company has adopted a Stock Purchase Plan (the "Stock Purchase Plan")
under which qualified employees of Pameco and its subsidiaries have the right
to purchase shares of Class A Common Stock on a
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<PAGE>
quarterly basis through payroll deductions. The Stock Purchase Plan will
become effective on January 1, 1998, and will be administered by an
administrator appointed by the Company's Board of Directors. The price to be
paid for a share of Class A Common Stock under the plan is 85% of the Fair
Market Value (as defined in the Stock Purchase Plan) of a share of Class A
Common Stock. The amount of any participant's payroll deductions made pursuant
to the Stock Purchase Plan may not exceed ten percent of such participant's
total annual compensation and may not exceed $25,000 per year. A maximum of
500,000 shares of Class A Common Stock, including a maximum of 100,000 shares
in any calendar year, may be issued under the Stock Purchase Plan. The Stock
Purchase Plan may be terminated or amended by the Company's Board of
Directors; provided, however, that no such amendment shall (i) disqualify the
Stock Purchase Plan under Section 423 of the Internal Revenue Code;
(ii) increase the aggregate number of shares of Class A Common Stock which may
be purchased pursuant to the Stock Purchase Plan or (iii) change the
designation of corporations whose employees may participate in the Stock
Purchase Plan. Any amendment to the Stock Purchase Plan which would effect the
actions described in clauses (ii) or (iii) above must be approved by the
Company's shareholders.
The Stock Purchase Plan is intended to qualify under Sections 421 and 423 of
the Internal Revenue Code. In accordance therewith, no income will be
recognized by a participant when shares are acquired pursuant to the Stock
Purchase Plan. With certain exceptions, when a Participant disposes of such
shares, he or she will recognize a capital gain equal to the difference
between the acquisition price and the amount realized on such disposition. The
Company will not be allowed a deduction with respect to any shares transferred
to a participant pursuant to the Stock Purchase Plan.
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<PAGE>
CERTAIN TRANSACTIONS
In November 1996, the Company repurchased 1,250,000 shares of Class A Common
Stock and 4,000 shares of Preferred Stock held by GFF, a minority shareholder.
The purchase price for the Class A Common Stock was $8.40 per share ($10.5
million total), and the purchase price for the Preferred Stock was $1,000 per
share ($4.0 million total). The cumulative purchase price for the GFF shares
was financed by the Company's issuance of a $15.0 million subordinated note to
Terfin, an affiliate of one of the members of the Investor Group, of which
$9.1 million was outstanding as of April 29, 1997, and which will be repaid in
full with a portion of the net proceeds of the Offering. See "Use of
Proceeds." In connection with the issuance of the subordinated note to Terfin,
the Company granted Terfin an option to purchase up to 62,500 shares of Class
B Common Stock at a purchase price of $8.40 per share. This option is
currently exercisable and terminates two months after the Company's payment in
full of the subordinated note.
In March 1997, Mr. Balkcom, a director of the Company, purchased 62,500
shares of Class A Common Stock from the Company at a purchase price of $9.60
per share for an aggregate purchase price of $600,000, which was financed by
Mr. Balkcom's issuance of a $600,000 promissory note to the Company. The
promissory note bears interest at the applicable federal rate, is payable in
full on March 10, 2002, is secured by the Class A Common Stock purchased and
is a full recourse note. The applicable federal rate is based upon the yield
to maturity of outstanding marketable obligations of the United States of
similar maturities during the one month period ending on the fourteenth day of
the month preceding the month for which the rates are applicable. The Internal
Revenue Service publishes the applicable federal rates for each month in the
Internal Revenue Bulletin. The applicable federal rate for May 1997 is 6.68%.
In December 1996, Mr. Balkcom and his wife and daughters also purchased an
aggregate of 95,237 shares of Class A Common Stock from the Company at a
purchase price of $8.40 per share for an aggregate purchase price of $800,000.
In December 1996, Mr. Bulkin, a director of the Company, and his wife
purchased 12,500 shares of Class A Common Stock from the Company at a purchase
price of $8.40 per share for an aggregate purchase price of $105,000.
Pursuant to the terms of a letter agreement dated March 1, 1997, Pameco
engaged TCR as the Company's financial advisor. Pursuant to the agreement, TCR
will provide advisory services to the Company and make certain of its
employees available to advise the Company on financial matters. Under the
agreement, the Company pays TCR an annual fee of $50,000 and reimburses TCR
for its out-of-pocket expenses. The Company has also agreed to indemnify TCR
against liabilities arising out of TCR's engagement. Messrs. Wagner and Weld,
both of whom are directors of the Company, are each Managing Directors of TCR.
The letter agreement extends to February 2002, unless terminated by the
Company under certain circumstances.
Pameco, the Investor Group, The Bank of Nova Scotia, Brian R. Esher and
certain employees of the Company made certain agreements and gave certain
undertakings pursuant to the Stockholders' Agreement (as previously defined)
with respect to their holdings of shares in the Company. These provisions
include: (i) certain "tag along" and "drag along" rights with respect to sales
of the Investor Group's stock in the Company; (ii) restrictions on the right
of sale of certain employee-held shares and an option in favor of the Company
to purchase such employee-held shares on termination of the employee's
employment by the Company; (iii) certain preemptive rights and rights of first
refusal; (iv) the right of appointment of a director of the Company by The
Bank of Nova Scotia and (v) an irrevocable proxy in favor of the Investor
Group to vote all other parties' shares with respect to elections to the
Company's Board of Directors. All of the provisions of the Stockholders'
Agreement (other than those referred to in (ii) above) terminate upon the
effectiveness of the Registration Statement of which this Prospectus is a
part. See Note 3 to the table under "Principal and Selling Shareholders" for a
list of the members of the Investor Group.
Pursuant to a letter agreement, the Investor Group and certain other
shareholders agreed to sell shares of Class A Common Stock to the Company so
that the Company could fulfill its obligations to issue shares under Plan I
upon the exercise of options granted thereunder. The purchase price for the
shares from these shareholders is the exercise price per share paid by the
option holder, with exercise prices ranging from $0.88 to $9.60 per share
(comprising an aggregate of $1.2 million). Upon completion of the distribution
of the shares of Class A Common Stock offered hereby, the Company will use a
portion of the net proceeds of the Offering to purchase all 206,847 shares of
Class A Common Stock still subject to the repurchase obligations under the
letter agreement for an aggregate purchase price of $1.2 million.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by (i) each director of the Company; (ii) each
executive officer of the Company; (iii) all directors and executive officers
of the Company as a group; (iv) each person known to the Company to
beneficially own more than five percent of any class of the outstanding Common
Stock and (v) the Selling Shareholders. Unless otherwise indicated, all shares
are owned directly and the indicated person has sole voting and investment
power. The number of shares represents the whole number of shares beneficially
owned as of May 30, 1997. The applicable percentages prior to the Offering
include 206,847 shares intended to be repurchased by the Company. Such
percentages subsequent to the Offering do not include such shares.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK TOTAL
--------------------------------------------- --------------------- ----------------------
SHARES
BENEFICIALLY PERCENT SHARES
OWNED OWNED BENEFICIALLY SHARES PERCENT OF PERCENT OF
NAME OF PRIOR TO PRIOR TO SHARES TO OWNED AFTER BENEFICIALLY PERCENT VOTING SHARES
BENEFICIAL OWNER(1) OFFERING OFFERING BE SOLD(2) OFFERING OWNED OF CLASS POWER OUTSTANDING
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TCR Investors(3)(4)..... 578,644 11.0% -- -- 4,046,346 100.0% 90.9% 50.0%
Gerald V. Gurbacki(5)... 515,625 9.0 -- 515,625 -- * 1.1 6.1
James R. Balkcom,
Jr.(6)................. 170,235 3.2 -- 170,235 -- * * 2.1
Michael H. Bulkin(7).... 25,000 * -- 25,000 -- * * *
G. Thomas Braswell,
Jr.(8)................. 12,500 * -- 12,500 -- * * *
Earl Dolive(8).......... 18,750 * -- 18,750 -- * * *
Brian Esher(9).......... 503,103 9.6 503,103 -- -- * * *
Charles A.
Sorrentino(8).......... 33,333 * -- 33,333 -- * * *
Theodore R.
Kallgren(8)............ 25,000 * -- 25,000 -- * * *
Jeffrey S. Ruege(8)..... 25,000 * -- 25,000 -- * * *
J. Christopher van
Ee(8).................. 22,917 * -- 22,917 -- * * *
Mark L. Davison(8)...... 3,125 * -- 3,125 -- * * *
The Bank of Nova
Scotia(10)............. 75,541 1.4 75,541 -- -- * * *
All directors and
executive officers as a
group (ten persons).... 851,485 14.8 -- 851,485 -- * 1.9 10.0
</TABLE>
- ---------------------
(*) Represents less than one percent of the outstanding Class A Common Stock
or Class B Common Stock, as applicable.
(1) Unless otherwise indicated, the address of the persons named above is care
of Pameco Corporation, 1000 Center Place, Norcross, Georgia 30093.
(2) No shares of Class B Common Stock will be sold in the Offering.
(3) TCR has sole and irrevocable power to vote and dispose of 3,872,210 shares
of Class B Common Stock that are owned of record by the following
entities, which constitute the entire Investor Group: Terbem Limited
(1,644,223 shares--40.6% of the Class B Common Stock), Mitvest Limited
(219,918 shares--8.4% of the Class B Common Stock), Tinvest Limited
(939,663 shares--23.2% of the Class B Common Stock), Bobst Investment
Corp. (279,901 shares--6.9% of the Class B Common Stock) and TCR
International
Notes continued on the following page.
50
<PAGE>
Partners, LP (788,505 shares--19.5% of the Class B Common Stock). Each
member of the Investor Group is an investment vehicle established for the
purpose of investing in securities of other enterprises in various parts of
the world, and the Investor Group acquired the shares of Class B Common
Stock as participants in an equity portfolio fund managed by TCR. Excludes
205,791 shares of Class A Common Stock owned by the Investor Group to be
repurchased by the Company with a portion of the net proceeds of the
Offering. See "Certain Transactions."
(4) Includes all 503,103 shares of Class A Common Stock beneficially owned by
Brian Esher and 75,541 of Class A Common Stock shares owned of record by
The Bank of Nova Scotia. Also includes all of the other outstanding shares
of Class B Common Stock, which are owned as follows: 55,818 shares of
Class B Common Stock owned of record by K Investment Partners LP, 34,111
shares of Class B Common Stock owned of record by Klingenstein Charitable
Partners and 21,707 shares of Class B Common Stock owned of record by TG
Partners. TCR has voting power over these shares pursuant to the
Stockholders' Agreement. See "Certain Transactions." The applicable
provisions of the Stockholders' Agreement will terminate upon
effectiveness of the Registration Statement of which this Prospectus is a
part. Includes Terfin's option to purchase up to 62,500 shares of Class B
Common Stock. See "Certain Transactions."
(5) These shares include stock options to purchase 438,750 shares of Class A
Common Stock which Mr. Gurbacki may exercise upon completion of the
Offering.
(6) Includes 35,713 shares held by Mr. Balkcom's wife and 11,954 shares held
by his daughters. Mr. Balkcom disclaims beneficial ownership of the shares
owned by his wife and daughters.
(7) Includes 12,500 shares held in joint tenancy with Mr. Bulkin's wife and
12,500 stock options which are currently exercisable.
(8) Includes stock options which are exercisable within 60 days of May 30,
1997.
(9) Includes 149,375 shares held by the Esher Children's Trust. Excludes 1,056
shares to be repurchased by the Company with a portion of the net proceeds
of the Offering. Mr. Esher's address is 9185 Old Southwick Pass,
Alpharetta, Georgia 30202.
(10) The Bank of Nova Scotia's address is 600 Peachtree Street, NE, Suite
2700, Atlanta, Georgia 30308.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
Class A Common Stock, par value $0.01 per share, 20,000,000 shares of Class B
Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $1.00 per share (the "Preferred Stock"). As of the date of
this Prospectus, there were 48 holders of record of Common Stock and 109
holders of options to acquire Class A Common Stock and one holder of options
to acquire Class B Common Stock. All outstanding shares of Common Stock are,
and the shares of Class A Common Stock offered hereby will be, upon payment
therefor, fully paid and nonassessable.
COMMON STOCK
The rights of holders of the Class A Common Stock and the Class B Common
Stock are identical in all respects except for voting rights and conversion
features.
Dividends. Subject to the rights of the holders of any class of Preferred
Stock, holders of record of shares of Common Stock on the record date fixed by
the Company's Board of Directors are entitled to receive such dividends as may
be declared by the Board of Directors out of funds legally available for such
purpose. No dividends may be declared or paid in cash or property on any share
of either class of Common Stock, however, unless simultaneously the same
dividend is declared or paid on each share of the other class of Common Stock.
In the case of any stock dividend, holders of Class A Common Stock are
entitled to receive the same percentage dividend (payable in shares of Class A
Common Stock) as the holders of Class B Common Stock receive (payable in
shares of Class B Common Stock). The payment of dividends is currently
restricted by the terms of the Credit Facilities. See "Description of Certain
Indebtedness."
Voting Rights. Holders of shares of Class A Common Stock and Class B Common
Stock vote as a single class on all matters submitted to a vote of the
shareholders, with each share of Class A Common Stock entitled to one vote and
each share of Class B Common Stock entitled to ten votes, except (i) for the
election of directors, (ii) with respect to any proposed "going private"
transaction (as defined below) between the Company and a Principal Shareholder
and (iii) as otherwise provided by law. In the election of directors, the
holders of Class A Common Stock, voting as a separate class, are entitled to
elect two of the Company's directors. The holders of Class B Common Stock,
voting as a separate class, are entitled to elect the remaining directors.
Holders of Common Stock are not entitled to cumulate votes in the election of
directors. A "Principal Shareholder" means any holder of record of Class B
Common Stock upon the date of this Prospectus.
The holders of Class A Common Stock and Class B Common Stock vote as a
single class with respect to any proposed "going private" transaction, with
each share of Class A Common Stock and Class B Common entitled to one vote per
share. A "going private" transaction is any "Rule 13e-3 Transaction", as such
term is defined in Rule 13e-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") between the Company and (i) a Principal
Shareholder, (ii) any Affiliate (as defined below) of a Principal Shareholder
or (iii) any group consisting of a Principal Shareholder or any Affiliate of a
Principal Shareholder. An Affiliate of a Principal Shareholder is (w) any
individual or entity who or that, directly or indirectly, controls, is
controlled by, or is under common control with, a Principal Shareholder, (x)
any corporation or organization (other than the Company or a majority-owned
subsidiary of the Company) of which any Principal Shareholder is a partner or
is, directly or indirectly, the beneficial owner of ten percent or more of any
class of voting securities, (y) any trust or other estate in which a Principal
Shareholder has a substantial beneficial interest or (z) any individual or
entity that directly or indirectly owns any equity interest in a Principal
Shareholder.
Under Georgia law, the affirmative vote of the holders of a majority of the
outstanding shares of any class of stock is required to approve, among other
things, a change in the designations, rights, preferences or limitations of
all or part of the shares of such class of stock.
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<PAGE>
Liquidation Rights. Upon liquidation, dissolution or winding-up of the
Company, the holders of the Common Stock are entitled to share ratably in all
assets available for distribution after payment in full of creditors and
payment in full to any holders of Preferred Stock then outstanding of any
amount required to be paid under the terms of such Preferred Stock.
Other Provisions. Each share of Class B Common Stock is convertible, at the
option of its holder, into one share of Class A Common Stock at any time. Each
share of Class B Common Stock converts automatically and without the
requirement of any further action into one share of Class A Common Stock upon
its sale or other transfer to a party unaffiliated with a Principal
Shareholder, and each share of Class B Common Stock converts automatically and
without the requirement of any further action into one share of Class A Common
Stock from and after the first date on which the issued and outstanding shares
of Class B Common Stock constitute less than ten percent of the aggregate
number of issued and outstanding shares of Class A Common Stock and Class B
Common Stock. The holders of Common Stock are not entitled to preemptive or
subscription rights. No class of Common Stock may be subdivided, consolidated,
reclassified or otherwise changed unless concurrently the other class of
Common Stock is subdivided, consolidated, reclassified or otherwise changed in
the same proportion and in the same manner.
PREFERRED STOCK
The authorized and unissued capital stock of the Company includes 5,000,000
shares of Preferred Stock, par value $1.00 per share. The Board of Directors
generally has the power to issue shares of capital stock without shareholder
approval. The Board of Directors is authorized to establish the rights,
preferences and limitations of any or all shares of Preferred Stock and to
divide such shares into classes, with or without voting rights, as the Board
may determine. No shares of Preferred Stock are currently designated, and
there is no current plan to designate or issue any such securities. However,
the ability of the Board of Directors to issue shares of Preferred Stock could
impede or deter an unsolicited tender offer or takeover proposal regarding the
Company. Shares of capital stock also could be issued with such terms,
provisions and rights which would make a takeover of the Company more
difficult and, therefore, less likely to occur. In addition, the issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock and could have the effect of making
removal of management more difficult. In certain circumstances, this could
have the effect of decreasing the market value of the Common Stock.
CERTAIN PROVISIONS OF GEORGIA LAW AND THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
The following summary of all material provisions of Georgia law and the
Articles of Incorporation and Bylaws of the Company does not purport to be
complete and is subject to and qualified in its entirety by reference to
Georgia law and the text of the Articles of Incorporation and Bylaws of the
Company, which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part. Certain provisions of Georgia law and the
Articles of Incorporation and Bylaws are described elsewhere in this
Prospectus.
ANTI-TAKEOVER PROTECTION
The Company has elected to be covered by two provisions of the Georgia Code
that restrict business combinations with interested shareholders. These
provisions do not apply to a Georgia corporation unless its bylaws
specifically make the statute applicable, and once adopted, such a bylaw may
be repealed only by the affirmative vote of at least two-thirds of the
continuing directors and a majority of the votes entitled to be cast by the
voting shares of the Company, other than shares beneficially owned by any
interested shareholder and, in some cases its associates and affiliates. This
vote is in addition to the requirement of the Company's Articles of
Incorporation and Bylaws that amendments to the Bylaws be approved by a
majority of the Board of Directors
53
<PAGE>
or by the vote of at least two-thirds of the votes entitled to be cast on the
amendment by each voting group entitled to vote on the amendment.
Interested Stockholders Transactions. The "business combination with
interested stockholders" statute of the Georgia Code regulates business
combinations, such as mergers, consolidations, share exchanges and asset
purchases, where the acquired business has at least 100 shareholders residing
in Georgia and has its principal office in Georgia, as the Company does, and
where the acquiror is an "interested shareholder" of the corporation, unless
either (i) the transaction resulting in such acquiror becoming an "interested
shareholder" or the business combination received the approval of the
corporation's Board of Directors prior to the date on which the acquiror
became an interested shareholder or (ii) the acquiror became the owner of at
least 90% of the outstanding voting stock of the corporation (excluding shares
held by directors, officers and affiliates of the corporation and shares held
by certain other persons) in the same transaction in which the acquiror became
an interested shareholder or in certain approved subsequent transactions. For
purposes of this statute, an "interested shareholder" generally is any person
who directly or indirectly, alone or in concert with others, beneficially owns
or controls ten percent or more of the voting power of the outstanding voting
shares of the corporation. The statute prohibits business combinations with an
unapproved interested shareholder for a period of five years after the date on
which such person became an interested shareholder. The statute restricting
business combinations is broad in its scope and is designed to deter
unfriendly acquisitions. The restrictions contained in this statute do not
apply to any person who was an "interested shareholder" prior to the Company's
adoption of this statute (such as the Investor Group). By law, the repeal of
such a bylaw is only effective 18 months after the shareholder vote to effect
such repeal and does not apply to any business combination between the Company
and any person who became an interested shareholder prior to such repeal.
Fair Price Requirements. The "fair price" statute of the Georgia Code
prohibits certain business combinations between a Georgia business corporation
and an interested shareholder or its affiliate. The fair price statute would
permit the business combination to be effected if (i) certain "fair price"
criteria are satisfied; (ii) the business combination is unanimously approved
by the continuing directors; (iii) the business combination is recommended by
at least two-thirds of the continuing directors and approved by a majority of
the votes entitled to be cast by holders of voting shares, other than voting
shares beneficially owned by any interested shareholder or (iv) the interested
shareholder has been such for at least three years and has not increased his
ownership position in such three-year period by more than one percent in any
12-month period. The fair price statute is designed to deter unfriendly
acquisitions that do not satisfy the specified "fair price" requirement. In
general, the fair-price requirement provides that in a two-step acquisition
transaction, the interested shareholder must pay the shareholders in the
second step either the same amount of cash or the same amount and type of
consideration paid to acquire the corporation's shares in the first step. The
restrictions contained in this statute will not apply to any person who is a
shareholder prior to the consummation of the Offering (such as the Investor
Group).
ARTICLES OF INCORPORATION AND BYLAWS
Board of Directors; Removal; Filling Vacancies. The Articles of
Incorporation and Bylaws provide that, subject to any rights of holders of
Preferred Stock to elect additional directors under specified circumstances,
the Board of Directors will consist of seven directors, three of whom will be
independent. The number of directors may be increased or decreased by
resolution adopted by a majority of the Board of Directors. The shareholders
shall be entitled to vote on the election or removal of directors, with each
share entitled to one vote, although a director elected by a particular class
of Common Stock may only be removed by the holders of such class of Common
Stock. See "--Common Stock."
The Bylaws provide that, subject to any rights of the Preferred Stock, and
unless the Board of Directors otherwise determines, any vacancies will be
filled by the affirmative vote of a majority of the remaining directors, even
if less than a quorum. Accordingly, the Board of Directors could temporarily
prevent any shareholder from enlarging the Board of Directors and from filling
the new directorships with such shareholder's own nominees.
54
<PAGE>
A vacancy resulting from an increase in the number of directors also must be
filled by action of a majority of the entire Board of Directors.
Amendment. In general, the Articles of Incorporation may be amended by a
vote of two-thirds of the votes entitled to vote on the amendment at a
properly called shareholder meeting, although the Articles of Incorporation
may be amended to increase the number of authorized shares of Common Stock by
a majority of the votes entitled to be cast on the amendment by each voting
group entitled to vote on the amendment. Further, neither the Articles of
Incorporation nor the Bylaws may be amended to alter the voting provisions
with respect to the Class A Common Stock and the Class B Common Stock in any
manner that would adversely affect the voting rights of the holders of such
shares without the consent of a majority of the holders of the potentially
affected class of Common Stock voting as a single voting group. The Company's
Bylaws may be amended by a majority of the Board of Directors or by the vote
of the holders of at least two-thirds of the votes entitled to be cast on the
amendment by each voting group entitled to vote on the amendment.
Directors and Officers Indemnification. The Company's Articles of
Incorporation provide for indemnification of directors to the fullest extent
permitted by Georgia law and, to the extent permitted by such law, eliminate
or limit the personal liability of directors to the Company and its
shareholders for monetary damages for certain breaches of fiduciary duty and
the duty of care. Such indemnification may be available for liabilities
arising in connection with this Offering. Insofar as indemnification for
liabilities under the Securities Act may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. Pursuant to its Articles of Incorporation, the
Company may indemnify its officers, employees, agents and other persons to the
fullest extent permitted by Georgia law. The Company's Bylaws obligate the
Company, under certain circumstances, to advance expenses to its directors and
officers in defending an action, suit or proceeding for which indemnification
may be sought. The Company has entered into Indemnification Agreements with
certain of its directors and officers. See "Management--Indemnification
Agreements."
The Company's Bylaws also provide that the Company shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of the Company's subsidiaries or, at
the request of the Company, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
where the Company would have the power to indemnify such person against such
liability under Georgia law. The Company intends to purchase and maintain such
insurance on behalf of all of its directors and executive officers.
Ability to Consider Other Constituencies. The Articles of Incorporation
permit the Board of Directors, in determining what is believed to be in the
best interests of the Company, to consider the interests of the employees,
customers, suppliers and creditors of the Company, the communities in which
offices or other establishments of the Company are located and all other
factors the directors consider pertinent, in addition to considering the
effects of any actions on the Company and its shareholders.
OTHER MATTERS
The transfer agent and registrar for the Company's Class A Common Stock is
SunTrust Bank, Atlanta, Georgia.
55
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a description of all material terms of the Credit
Facilities, which will remain outstanding following consummation of the
Offering. The summaries set forth below are qualified in their entirety by
reference to the text of the agreements relating to the Credit Facilities,
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
WORKING CAPITAL FACILITY
The Company has established the Working Capital Facility with General
Electric Capital Corporation (the "Lender") under which the Company may obtain
up to $100.0 million in loans and letters of credit subject to, among other
conditions, the Company's having adequate eligible inventory and unsold
accounts receivable to support such credit extensions and the absence of any
defaults. The Company's obligations under the Working Capital Facility are
secured by all of the inventory, equipment and other personal property of the
Company. The Working Capital Facility is provided under a credit agreement
between the Company and the Lender (the "Credit Agreement") which obligates
the Company, among other things, to comply with certain affirmative, negative
and financial covenants.
The Working Capital Facility terminates on November 21, 2001, and all
borrowings thereunder mature on that date, subject to earlier termination and
acceleration by the Lender upon the occurrence by any event of default
specified in the Credit Agreement. The Company may prepay in full all
borrowings under the Working Capital Facility and terminate the Working
Capital Facility at any time, but a prepayment fee may be owing by the Company
to the Lender if the Working Capital Facility is prepaid in full and
terminated prior to April 29, 1999, subject to certain exceptions.
The Company is obligated to pay a monthly unused line fee for the Working
Capital Facility. Borrowings under the Working Capital Facility bear interest
at a monthly-adjustable rate (based on LIBOR), plus a margin, which margin may
decrease depending upon the Company's financial performance for its most
recently completed fiscal period and is subject to increase during any
default. The Company may also fix the interest rate for periods of one to
three months as provided in the Credit Agreement.
At February 28, 1997, borrowings under the Working Capital Facility were
$29.8 million, and the interest rate was 7.69%.
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
In April 1996, the Company commenced an accounts receivable securitization
program (the "Securitization Program") that provides the Company with up to
$50.0 million of funding from the sale of trade accounts receivable generated
by the Company; however, the sum of its outstanding borrowings and letters of
credit under the Working Capital Facility, including outstanding fundings
under the Securitization Program, may not exceed $100.0 million at any one
time.
In connection with the Securitization Program, the Company formed a special-
purpose, wholly-owned subsidiary, Pameco Securitization Corporation ("PSC"),
to serve as the purchaser of accounts receivable of the Company. The Company
and PSC, in turn, entered into a receivables purchase and servicing agreement
(the "Purchase Agreement") with Redwood Receivables Corporation (the
"Purchaser") and the Lender as operating agent, both of which are unaffiliated
with the Company.
Under the Securitization Program, PSC purchases from the Company and pools,
on at least a weekly basis, accounts receivable and related rights (the
"Pool") for a cash purchase price equal to the outstanding balance of such
receivables at the time of such sale (less PSC's anticipated financing costs
and less the amount of certain
56
<PAGE>
doubtful or delinquent accounts). The Purchaser, in turn, purchases each Pool
from PSC by investing cash in PSC, up to a maximum outstanding investment of
$50.0 million at any one time for all such purchases, which entitles the
Purchaser to an agreed upon investment yield (based on the Purchaser's cost of
funds plus a margin) and to the repayment of its investment if it ceases
purchasing additional Pools of receivables from PSC. PSC, in turn, uses the
proceeds of its sale of Pools to the Purchaser to finance its purchase of such
Pools from the Company as well as to make periodic loans to the Company. Daily
collections on the sold receivables are controlled and administered by the
Company acting as servicer for PSC and the Purchaser, and after reservation of
the Purchaser's accrued investment yield, are automatically reinvested and
used to pay for the purchase of new Pools of receivables from the Company. PSC
is obligated to pay a monthly unused facility fee to the Purchaser for the
Securitization Program.
As of February 28, 1997, the Purchaser's aggregate outstanding investment
under the Securitization Program was $30.5 million, and the interest rate was
6.89%.
The Purchase Agreement specifies several events of termination that would
permit the Purchaser to cease purchasing additional Pools of receivables from
PSC. The Purchase Agreement also specifies certain events of servicer
termination that would permit the Purchaser to take control of collections on
the sold receivables. Moreover, the Purchaser's obligation to continue to
purchase additional Pools of receivables terminates on November 21, 2001. PSC
may also terminate its sale of additional Pools of receivables to the
Purchaser on not less than 90 days' prior written notice to the Purchaser.
Upon the termination of Purchaser's purchase of additional Pools of
receivables from PSC, Purchaser's investment in the Pools will be repaid from
future collections on the sold receivables in such Pools.
If the Purchaser ceases purchasing additional Pools of receivables from PSC,
so that its outstanding investment was reduced by collections on previously
sold receivables, the Company expects that it would seek to borrow a
sufficient sum under its Working Capital Facility to permit PSC to repay all
amounts owing to the Purchaser with respect to its investment under the
Securitization Program. However, the occurrence of certain events of
termination or events of servicer termination under the Purchase Agreement may
also constitute events of default under the Working Capital Facility, which
would permit the Lender to withhold future loans to the Company. If the
Company were not able to borrow sufficient sums under the Working Capital
Facility (or otherwise obtain the funding necessary) to refinance the
Purchaser's investment in the Pools of receivables previously sold to it under
the Securitization Program, then control of collections on the receivables in
such Pools could remain with the Purchaser until it recovered its investment
in such Pools.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of the Offering, the Company will have
8,052,747 shares of Common Stock outstanding, of which the 3,578,644 shares of
Class A Common Stock sold pursuant to the Offering will be freely tradeable
without restriction or further registration under the Securities Act, except
those shares acquired by "affiliates" of the Company as that term is defined
under the Securities Act. Holders of the remaining shares will be eligible to
sell such shares pursuant to Rule 144 ("Rule 144") under the Securities Act at
prescribed times and subject to the manner of sale, volume, notice and
information restrictions of Rule 144.
The Company, its officers, directors and certain other shareholders
including the Selling Shareholders, who collectively own 403,228 shares and
hold options to acquire an aggregate of 543,667 shares of Class A Common Stock
and who collectively own 3,983,846 shares of Class B Common Stock, have agreed
with the Underwriters, except with the prior written consent of DLJ and
subject to certain limited exceptions, not to offer, sell, pledge, contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of directly or indirectly any shares of Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for Common
Stock or in any other manner transfer all or a portion of the economic
consequences associated with the ownership of any Common Stock for a period of
180 days after the date of this Prospectus. Upon the expiration of such 180
day period, such holders will in general be entitled to dispose of their
shares, although the shares of Common Stock held by affiliates of the Company
will continue to be subject to the restrictions of Rule 144.
In addition, the Company may issue shares of Class A Common Stock (and may
consider filing a registration statement with respect to such shares) in
connection with potential future business acquisitions and resales of such
shares by the recipients. Shares so registered could be sold in the public
market. No predictions can be made as to the effect, if any, that market sales
of such shares or the availability of such shares for sale will have on the
market price for shares of Class A Common Stock prevailing from time to time.
Sales of substantial amounts of shares of Common Stock in the public market
following the Offering could adversely affect the market price of the Class A
Common Stock and could impair the Company's future ability to raise capital
through an offering of equity securities.
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
a syndicate of underwriters named below (the "Underwriters"), for whom DLJ,
Robinson-Humphrey and Schroder Wertheim are acting as representatives, have
severally agreed to purchase from the Company and the Selling Shareholders an
aggregate of 3,578,644 shares of Class A Common Stock. The number of shares of
Class A Common Stock that each Underwriter has agreed to purchase is set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
The Robinson-Humphrey Company, Inc..............................
Schroder Wertheim & Co. Incorporated............................
---
Total.......................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval of certain legal matters by
counsel and to certain other conditions. If any of the shares of Class A
Common Stock are purchased by the Underwriters pursuant to the Underwriting
Agreement, all such shares (other than those covered by the over-allotment
option described below) must be so purchased. The offering price and
underwriting discounts and commissions per share for shares of Class A Common
Stock offered by the Company and the Selling Shareholders are identical.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect hereof.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Class A Common Stock to the public initially at the
price to the public set forth on the cover page of this Prospectus and to
certain dealers (who may include the Underwriters) at such price, less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may re-allow, discounts not in excess of $ per share to any
other Underwriter and certain other dealers. After the Offering, the offering
price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 536,797 additional shares of Class A Common Stock, at the initial
public offering price less underwriting discounts and commissions, solely to
cover over-allotments. Such option may be exercised at any time until 30 days
after the date of this Prospectus. To the extent that the Representatives
exercise such option, each of the Underwriters will be committed, subject to
certain conditions, to purchase a number of shares proportionate to such
Underwriter's initial commitment as indicated in the preceding tables.
The Company, its officers, directors and certain other shareholders,
including the Selling Shareholders, who collectively own 403,228 shares and
hold options to acquire an aggregate of 543,667 shares of Class A Common Stock
and who collectively own 3,983,846 shares of Class B Common Stock, have agreed
with the Underwriters, except with the prior written consent of DLJ and
subject to certain limited exceptions, not to offer, sell, pledge, contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of directly or indirectly any shares of Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for Common
Stock or in any other manner transfer all or a portion of the economic
consequences associated with the ownership of any Common Stock for a period of
180 days after the date of this Prospectus. See "Shares Eligible for Future
Sale."
59
<PAGE>
No action has been taken in any jurisdiction by the Company, the Selling
Shareholders or the Underwriters that would permit a public offering of the
Class A Common Stock offered pursuant to the Offering in any jurisdiction
where action for that purpose is required, other than the United States. The
distribution of this Prospectus and the offering or sale of the shares of
Class A Common Stock offered hereby in certain jurisdictions may be restricted
by law. Accordingly, the shares of Class A Common Stock offered hereby may not
be offered or sold, directly or indirectly, and neither this Prospectus nor
any other offering material or advertisements in connection with the Class A
Common Stock may be distributed or published, in or from any jurisdiction,
except under circumstances that will result in compliance with applicable
rules and regulations of any such jurisdiction. Such restrictions may be set
out in applicable Prospectus supplements. Persons into whose possession this
Prospectus comes are required by the Company, the Selling Shareholders and the
Underwriters to inform themselves about and to observe any applicable
restrictions. This Prospectus does not constitute an offer of, or an
invitation to subscribe for purchase of, any shares of Class A Common Stock
and may not be used for the purpose of an offer to, or solicitation by, anyone
in any jurisdiction or in any circumstances in which such offer or
solicitation is not authorized or is unlawful.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed five percent of the total
number of shares of Class A Common Stock offered by them and the sales to
discretionary accounts by the Representatives will be less than one percent of
the total number of shares of Class A Common Stock offered by them.
A portion of the shares offered hereby will be reserved for sale to certain
employees, suppliers and customers of the Company and its subsidiaries, and
other persons designated by the Company, and the number of shares offered to
the public hereby will be reduced to the extent those persons purchased such
shares. The price per share of the shares to be sold to these persons will be
the same as the price to the public in the Offering. The maximum investment of
any such person may be limited by the Company in its sole discretion. This
program will be administered by Robinson-Humphrey. The number of shares to be
sold under this program shall not exceed five percent of the number of shares
of Class A Common Stock offered in connection with the Offering.
Prior to the Offering, there has been no public market for the shares of
Class A Common Stock. The initial public offering price has been negotiated
among the Company, the Selling Shareholders and the Representatives. The
factors considered in determining the initial public offering price of the
Class A Common Stock, in addition to prevailing market conditions, were the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A Common
Stock. Specifically, the Underwriters may overallot the offering, creating a
syndicate short position. In addition, the Underwriters may bid for, and
purchase, shares of Class A Common Stock in the open market to cover syndicate
shorts or to stabilize the price of the Class A Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for
distributing the Class A Common Stock in the Offering, if the syndicate
repurchases previously distributed Class A Common Stock in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Class A Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The Representatives have informed the Company and the Selling Shareholders
that the Underwriters do not intend to confirm sales of shares of Class A
Common Stock offered hereby to accounts over which they exercise discretionary
authority.
The Class A Common Stock has been approved for listing on The New York Stock
Exchange subject to notice of issuance under the symbol "PCN."
60
<PAGE>
Each of DLJ and Robinson-Humphrey from time to time perform investment
banking and other financial services for the Company and its affiliates for
which DLJ and Robinson-Humphrey may receive advisory or transaction fees, as
applicable, plus out-of-pocket expenses, of the nature and in amounts
customary in the industry for such services.
EXPERTS
The consolidated financial statements and schedule of Pameco Corporation at
February 29, 1996 and February 28, 1997, and for each of the three years in
the period ended February 28, 1997 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing herein and in the
Registration Statement and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Kilpatrick Stockton LLP, Atlanta, Georgia, and
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York.
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act
with respect to the Class A Common Stock offered hereby. As used herein, the
term "Registration Statement" means the initial Registration Statement and any
and all amendments thereto. This Prospectus omits certain information
contained in said Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Class A Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto. Statements herein
concerning the contents of any contract or other document are not necessarily
complete and in each instance reference is made to such contract or other
document filed with the Commission as an exhibit to the Registration
Statement. Although all material terms of the respective contracts or other
documents are set forth with such statements, each such statement is qualified
in its entirety by such reference.
As a result of the Offering, the Company will become subject to the
informational requirements of the Exchange Act, and in accordance therewith
will file reports and other information with the Commission. Reports,
registration statements, proxy statements and other information filed by the
Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following
regional offices of the Commission: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, New York, New York
10048. Copies of such materials can be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, or at the Commission's web site at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets as of February 29, 1996 and
February 28, 1997.......................................................... F-3
Consolidated Statements of Income for the years ended
February 28, 1995, February 29, 1996 and February 28, 1997................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1995, February 29, 1996 and February 28, 1997................. F-5
Consolidated Statements of Cash Flows for the years ended
February 28, 1995, February 29, 1996 and February 28, 1997................. F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
The following report is in the form that will be signed upon the restatement
of capital accounts pursuant to filing of the merger agreement described in
Note 10 to the consolidated financial statements.
ERNST & YOUNG LLP
May 1, 1997
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pameco Corporation
We have audited the accompanying consolidated balance sheets of Pameco
Corporation (formerly Pameco Holdings, Inc.) as of February 29, 1996 and
February 28, 1997, and the related statements of income, shareholder's equity
and cash flows for each of the three years in the period ended February 28,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 Pameco
Corporation at February 29, 1996 and February 28, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended February 28, 1997.
ERNST & YOUNG LLP
Atlanta, Georgia
April 2, 1997, except for Note 10 as to which the date is May , 1997
F-2
<PAGE>
PAMECO CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 115 $ 145
Accounts receivable, less allowance of $1,878 at
February 29, 1996
and $2,535 at February 28, 1997................... 36,273 17,811
Inventories........................................ 76,352 107,477
Prepaid expenses and other current assets.......... 897 932
-------- --------
Total current assets............................. 113,637 126,365
Property and equipment, net.......................... 3,333 5,647
Excess of cost over acquired net assets, net......... -- 8,411
Other assets......................................... 444 693
Deferred income tax assets........................... 1,753 8,253
-------- --------
Total assets..................................... $119,167 $149,369
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 32,660 $ 57,024
Accrued compensation and withholdings.............. 6,205 7,438
Other accrued liabilities and expenses............. 11,808 13,279
Notes payable to affiliate......................... -- 14,100
Current portion of capital lease obligations and
other debt......................................... 581 375
-------- --------
Total current liabilities........................ 51,254 92,216
Long-term liabilities:
Debt............................................... 33,438 29,800
Debt to affiliates................................. 7,500 4,500
Capital lease obligations.......................... 409 79
Warranty reserves and other........................ 1,625 1,920
-------- --------
Total long-term liabilities...................... 42,972 36,299
Excess of acquired net assets over cost, net......... 7,447 6,223
Preferred stock, $1 par value authorized 25,000
shares; 4,000 shares issued and outstanding
(Liquidation preference $1,000 per share)........... 4,000 --
Shareholders' equity:
Common stock, $.01 par value--authorized 13,750
shares; 6,250 and 6,358 shares issued and
outstanding at February 29, 1996 and
February 28, 1997, respectively................... 63 64
Capital in excess of par value..................... 937 1,841
Retained earnings.................................. 12,494 23,226
-------- --------
13,494 25,131
Less treasury stock at cost 1,250 shares........... -- (10,500)
-------- --------
Total shareholders' equity........................... 13,494 14,631
-------- --------
Total liabilities and shareholders' equity........... $119,167 $149,369
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.............................. $323,152 $334,537 $378,658
Costs and expenses:
Cost of products sold................ 243,887 255,301 285,439
Warehousing, selling, and
administrative expenses.............. 70,467 69,405 81,250
Severance............................ -- 1,230 --
Executive cash bonus................. -- -- 2,173
Amortization of excess of acquired
net assets over cost................. (1,224) (1,224) (1,224)
-------- -------- --------
313,130 324,712 367,638
-------- -------- --------
Operating earnings..................... 10,022 9,825 11,020
Other income (expense):
Interest expense, net................ (4,818) (4,732) (3,923)
Other income (expense)............... 189 (482) (1,533)
-------- -------- --------
Income before income taxes............. 5,393 4,611 5,564
Provision (benefit) for income taxes... 575 (1,403) (5,592)
-------- -------- --------
Net income............................. 4,818 6,014 11,156
Redeemable preferred stock dividends... 547 520 424
-------- -------- --------
Net income applicable to common
shareholders........................... $ 4,271 $ 5,494 $ 10,732
======== ======== ========
Net income per share................... $ .65 $ .83 $ 1.71
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding.. 6,598 6,598 6,258
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF TREASURY RETAINED
SHARE AMOUNT PAR VALUE STOCK EARNINGS TOTAL
------- ------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28,
1994.................... 10,000 $100 $ 900 $ -- $ 2,729 $ 3,729
Reverse common stock
split--
1 share for 2
shares............... (5,000) (50) 50 -- -- --
Common stock split--
1.25
shares for 1 share... 1,250 13 (13) -- -- --
------- ---- ------ -------- ------- -------
Balances at February 28,
1994.................... 6,250 63 937 -- 2,729 3,729
Net income............ -- -- -- -- 4,271 4,271
------- ---- ------ -------- ------- -------
Balances at February 28,
1995.................... 6,250 63 937 -- 7,000 8,000
Net income............ -- -- -- -- 5,494 5,494
------- ---- ------ -------- ------- -------
Balances at February 29,
1996.................... 6,250 63 937 -- 12,494 13,494
Purchase of 1,250
shares of
treasury stock....... (1,250) -- -- (10,500) -- (10,500)
Sale of 108 shares of
common
stock................ 108 1 904 -- -- 905
Net income............ -- -- -- -- 10,732 10,732
------- ---- ------ -------- ------- -------
Balances at February 28,
1997.................... 5,108 $ 64 $1,841 $(10,500) $23,226 $14,631
======= ==== ====== ======== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 4,271 $ 5,494 $ 10,732
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization of excess of acquired
net assets over cost................ (1,224) (1,224) (1,224)
Depreciation and other amortization.. 735 994 1,425
Loss on sale of property and
equipment............................ 38 332 2
Deferred tax asset................... -- (1,753) (6,500)
Changes in operating assets and
liabilities net of assets acquired:
Accounts receivable................ 2,231 (3,271) 23,380
Inventories, prepaid expenses and
other assets....................... (3,977) 11,211 (16,294)
Accounts payable and accrued
liabilities........................ (756) (7,283) 23,806
-------- -------- --------
Net cash provided by operating
activities............................. 1,318 4,500 35,327
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and
equipment.............................. (779) (1,398) (2,128)
Proceeds from sale of property and
equipment.............................. 167 182 82
Business acquisitions.................. -- -- (26,560)
-------- -------- --------
Net cash used in investing activities.. (612) (1,216) (28,606)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on working capital
facility............................... 339,817 342,729 430,405
Repayments on working capital
facility............................... (340,169) (339,490) (434,045)
Issuance of notes to affiliate......... -- -- 22,500
Repayments on notes to affiliate....... -- -- (8,400)
Repayment on subordinated notes........ -- (6,000) (3,000)
Payments on capital lease obligations.. -- -- (520)
Payments on other debt................. (367) (528) (36)
Proceeds from issuance of common
stock.................................. -- -- 905
Redemption of preferred stock.......... -- -- (4,000)
Purchase of treasury stock............. -- -- (10,500)
-------- -------- --------
Net cash used in financing activities.. (719) (3,289) (6,691)
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents....................... (13) (5) 30
Cash and cash equivalents at beginning
of year................................ 133 120 115
-------- -------- --------
Cash and cash equivalents at end of
year................................... $ 120 $ 115 $ 145
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES
Acquisition of equipment under capital
lease obligations...................... $ 880 $ 255 $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Pameco
Corporation (formerly Pameco Holdings, Inc. and Pameco Corporation, both
Delaware corporations) and its wholly-owned subsidiary (collectively the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
DESCRIPTION OF BUSINESS
The Company is a nationwide wholesale distributor of heating, ventilation
and air conditioning ("HVAC") and refrigeration equipment, with approximately
294 branches located in 44 states and Guam. The principal components of the
Company's business are sales of heating, air conditioning, and refrigeration
parts and equipment to the commercial and residential markets.
The Company's operating results vary significantly from quarter to quarter.
Sales increase during the warmer months beginning in April and peak in the
months of June, July, and August. For the year ended February 28, 1997, the
Company's second fiscal quarter accounted for approximately 33% of its sales
and 69% of its annual operating earnings, before non-recurring charges.
Sales of HVAC and refrigeration equipment and replacement components are
also affected by weather patterns and seasonal equipment start-ups. Warmer
than normal summer temperatures or colder than normal winter temperatures
cause increased stress on cooling and heating equipment. Increased stress on
equipment produces higher failure rates and therefore increased sales volume
of replacement equipment. Start-up modes for inactive equipment also produce
higher failure rates and an increase in replacement business on a seasonal
basis. Management believes the Company's national branch coverage mitigates
much of the risk associated with regional or local weather patterns.
INITIAL PUBLIC OFFERING
In March 1997, the Company commenced plans to offer up to 3.0 million newly
issued shares of Class A Common Stock in an initial public offering ("IPO").
CASH EQUIVALENTS
For purposes of the accompanying statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
INVENTORIES
Inventories consist of finished goods held for resale and are stated at the
lower of cost or market. Cost is determined by the first-in, first-out method.
During 1997, approximately 72% of all inventory purchases were made from ten
primary vendors. To help ensure adequate future inventory supply sources, the
Company maintains supply relationships with numerous other vendors.
The Company provided reserves for excess and idle inventory aggregating $2.6
million and $3.7 million as of February 29, 1996 and February 28, 1997,
respectively.
F-7
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
PROPERTY AND EQUIPMENT
Properties are recorded at cost and include expenditures for additions and
major improvements. Expenditures for repairs and maintenance are charged to
operations as incurred. Depreciation is computed using the straight line
method over the estimated useful lives of the respective assets. The estimated
useful lives for property and equipment range from three to ten years.
EXCESS OF COST OVER ACQUIRED NET ASSETS
Excess of cost over acquired net assets is a result of business acquisitions
in fiscal 1997 of Chase Supply Company of Chicago ("Chase") and certain
branches from Sid Harvey Industries, Inc. ("Sid Harvey") and is being
amortized on a straight-line basis over 40 years. Accumulated amortization of
the excess of cost over acquired net assets was approximately $70,000 at
February 28, 1997.
EXCESS OF ACQUIRED NET ASSETS OVER COST
Excess of the acquired net assets over cost is being amortized on a
straight-line basis over 10 years. Accumulated amortization of the excess of
acquired net assets over cost was approximately $4.8 and $6.0 million at
February 29, 1996 and February 28, 1997, respectively.
USE OF ESTIMATES
The preparation of the 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 inevitably will differ from those
estimates, and such differences could be material to the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform to the current year presentation.
CREDIT POLICY
The Company performs periodic credit evaluations of its customers' financial
condition and in some instances places liens on certain projects. Receivables
are generally due within 30 days. Credit losses have been within management's
expectations.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, as well as for long-lived assets and certain identifiable
F-8
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
intangibles to be disposed of. The Company adopted the new Standard on March
1, 1996. The effect of adoption was not material.
Standards of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") encourages companies to recognize expense for
stock-based awards based on their fair values on the date of grant. At a
minimum, SFAS 123 requires pro forma disclosures in the Company's 1996
financial statements. The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related interpretations and provide the necessary disclosures required by
SFAS 123, rather than adopt the expense recognition provisions of this
Standard (see Note 6).
During the year ended February 28, 1997, the Company adopted Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). The
Company's asset securitization agreement (see Note 4) meets the requirements
of SFAS 125 to enable the Company to continue recognizing transfers of
receivables to a special-purpose entity as sales. As a result, the impact of
adoption on net income in 1997 was not material.
In February 1997, the Financial Accounting Standard Board issued Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") which is
required to be adopted for the year ending February 28, 1998. At that time,
the Company will be required to change the method currently used to compute
earnings per share and restate prior periods. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will be
excluded. The impact is expected to result in an increase in primary earnings
per share for the years ended February 29, 1996 and February 28, 1997 of $.05
and $.11, respectively. The impact of SFAS 128 on the calculation of fully
diluted earnings per share for these years is not expected to be material.
EARNINGS PER SHARE
Historical earnings per share was computed using the requirements of
Accounting Principles Board Opinion No. 15 and SEC Staff Accounting Bulletin
No. 83.
Pursuant to SEC Staff Accounting Bulletin No. 83, common stock and common
stock equivalents issued at prices below the assumed initial public offering
price per share ("cheap stock") during the twelve month period immediately
preceding the initial filing date of the Company's Registration Statement for
its public offering have been included in historical earnings per share as if
outstanding for all periods presented (using the treasury stock method at the
assumed initial public offering price).
The amounts computed for primary and fully diluted historical net income per
share of common stock are the same in 1995, 1996, and 1997.
Retroactive restatement has been made to all disclosures of shares, weighted
average shares and net income per share disclosures for the one share for two
shares reverse Common Stock split effected on October 16, 1996 and the 1.25
shares for one share stock split effected on May , 1997 (see Note 10).
F-9
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable, and accounts payable approximate their fair values. The
fair values of the Company's debt approximate the reported amounts in the
consolidated balance sheets as their respective interest rates approximate the
market rates for similar debt instruments.
MANAGEMENT ADVISORY SERVICES
The Company receives certain advisory services from Three Cities Research,
Inc. Three Cities Research, Inc. is the investment advisor for certain
investors who owned 68% and 76% of the stock of the Company at February 29,
1996 and February 28, 1997, respectively. Three Cities Research, Inc. is paid
an annual fee of $50,000 for advisory services.
2. ACQUISITIONS
On May 2, 1996, the Company acquired Chase for approximately $3.2 million in
cash. Chase is a six branch wholesale distributor of refrigeration and HVAC
equipment and supplies in the greater Chicago area.
On November 22, 1996, the Company acquired certain assets of Sid Harvey for
$23.3 million in cash. The Sid Harvey acquisition consisted of 52 branches
which sell refrigeration and HVAC equipment and supplies throughout the
southeastern United States.
Both acquisitions were accounted for under the purchase method of
accounting. The results of operations of the acquired companies are included
in the consolidated statement of income as of the acquisition date. The assets
and liabilities of the acquired companies are included in the Company's
consolidated balance sheet based on a preliminary allocation of their
estimated fair values on the date of acquisition. The excess of cost over
acquired net assets of the businesses acquired has been recorded as an
intangible asset and amounted to $8,481,000 at the dates of acquisition. Such
amount will be amortized on a straight-line basis over 40 years.
Summary unaudited pro forma results of operations for the acquisitions of
the Sid Harvey and Chase branches are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net sales........................................... $ 394,460 $ 421,032
========== ==========
Net income applicable to common shareholders........ $ 5,404 $ 10,552
========== ==========
Net income per common share......................... $ .82 $ 1.69
========== ==========
Weighted average common and common equivalent shares
outstanding......................................... 6,598 6,258
========== ==========
</TABLE>
The above unaudited pro forma results of operations give effect to the
acquisitions as if they had occurred on March 1, 1995. The pro forma
adjustments for the acquisitions are based upon the available information and
F-10
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
2. ACQUISITIONS (CONTINUED)
certain assumptions that management believes are reasonable. The adjustments
to the historical data reflect the following: (i) general and administrative
costs were increased to reflect the incremental amount of costs the Company
estimates it would have incurred over the applicable time period; (ii)
interest expense assuming the Company financed the acquisition at a rate of
7.3%--the Company's weighted average borrowing rate; (iii) amortization of the
excess of cost over acquired net assets; (iv) income taxes on the earnings of
the acquirees have been adjusted to reflect the Company's effective tax rate;
and (v) the income tax effect of such pro forma adjustments.
These unaudited pro forma results of operations do not purport to represent
what the Company's actual results of operations would have been if the
acquisitions had occurred on March 1, 1995, and should not serve as a forecast
of the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. However, the full impact
of potential cost savings has not been reflected in the pro forma results
presented above, although there can be no assurances such cost savings will be
achieved. Subsequent adjustments are expected upon final determination of the
allocation of the purchase price.
On March 3, 1997, the Company acquired the assets of Bellows-Evans, Inc.
("Bellows"), for $300,000 in cash. Bellows is a distributor of HVAC equipment
in Birmingham, Alabama.
3. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Buildings and leasehold improvements.................. $ 341 $ 874
Machinery and equipment............................... 846 1,889
Furniture, office, and computer equipment............. 3,834 5,673
--------- ---------
5,021 8,436
Accumulated depreciation.............................. (1,688) (2,789)
--------- ---------
$ 3,333 $ 5,647
========= =========
</TABLE>
F-11
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
4. DEBT
The components of debt are as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Working capital facility.............................. $33,430 $29,790
Junior subordinated notes............................. 5,000 4,500
Subordinated notes.................................... 2,500 --
Notes payable to affiliates........................... -- 14,100
Other................................................. 36 22
------- -------
40,966 48,412
Less current portion of debt.......................... (28) (14,112)
------- -------
$40,938 $34,300
======= =======
</TABLE>
On April 29, 1996, the Company entered into an asset securitization lending
arrangement (the "Securitization Program") with General Electric Capital
Corporation, Redwood Receivables Corporation ("Redwood"), and Pameco
Securitization Corporation ("PSC"). The capital commitment for the program was
$40 million and the borrowing rate was the Redwood Receivables Commercial
Paper rate plus 1.50%. At February 28, 1997, this rate was 6.89%. The
Securitization Program is an off-balance sheet arrangement that provides for
the transfer and sale of accounts receivable to a special-purpose wholly-owned
subsidiary that then sells the accounts receivable to Redwood, which issues
commercial paper on the Company's behalf. At February 28, 1997, $30.5 million
of accounts receivable have been sold under the Securitization Program, and
the sale has been reflected as a reduction of accounts receivable in the
Company's balance sheet. The discount of $1.4 million on the accounts
receivable sold has been recorded as other expense in the Company's statement
of income for the year ended February 28, 1997. The Company maintains an
allowance for doubtful accounts based upon the expected collectibility of all
trade accounts receivable, including accounts receivable sold by PSC. The
Company has agreed to continue to service accounts receivable transferred
under the Securitization Program. The Company has not accrued a liability for
such servicing as the Company believes such cost is not significant.
On January 24, 1997, the Company amended the Securitization Program to
increase the commitment to $50 million, increase the availability, and to
permit the transfer and sale of receivables generated by the branches acquired
from Sid Harvey. In accordance with the Securitization Program, if certain
conditions are met, the Company can incrementally reduce the rate of interest
down to Redwood's Commercial Paper rate plus 1.25%.
On April 29, 1996, the Company amended its existing collateral-based
revolving line of credit (the Working Capital Facility') to increase the
commitment to $30 million and to extend the expiration date to April 29, 2001.
Interest is computed using the 30-day LIBOR rate plus 2.25%, with an option
for the Company to fix up to five tranches of debt using the 60-day LIBOR or
90-day LIBOR rate plus 2.25%. At February 28, 1997, this rate was 7.69%.
On November 21, 1996, the Company amended the Working Capital Facility to
increase the commitment to $50 million and extend the expiration date of both
the Securitization Program and the Revolving Credit Line until November 21,
2001.
The junior subordinated notes and subordinated notes pay interest quarterly
at the prime rate and mature on September 1, 2001 and November 1, 2001,
respectively. During the year ended February 28, 1997, the Company repaid $3
million of such debt.
On November 7, 1996, the Company borrowed $15 million from Terfin
International, Ltd. ("Terfin"), an affiliate of a shareholder of the Company,
and in exchange issued a promissory note (the "Note"). The Note
F-12
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
4. DEBT--(CONTINUED)
pays interest at a rate of 12.5% per annum and is subordinate to the
Securitization Program and the Working Capital Facility. The maturity date on
the Note was December 31, 1996. On November 21, 1996, the Note was amended to
extend the maturity date to February 28, 1997. At the Company's option, the
maturity date of the Note may be further extended to June 30, 1997. On January
13, 1997, the Company repaid $900,000 of principal on the Note with the
proceeds from sales of common stock to certain members of the Board of
Directors. On February 28, 1997, the Company exercised its option to extend
the maturity of the Note to June 30, 1997.
The Note included the issuance of detachable stock purchase warrants to
purchase 62,500 shares of the Company's common stock at $8.40 per share, all
of which are currently vested. The warrants expire two months after repayment
of principal and interest related to the Note. The amount assigned to the
warrants and to the related debt discount was not material.
On November 21, 1996, the Company borrowed $7.5 million from Terfin. The
note accrued interest at a rate of 12.5% per annum and was subordinate to the
indebtedness under the Securitization Program and the Working Capital
Facility. The maturity date on the note was March 31, 1997. On February 3,
1997, the Company paid the entire principal and interest due on the note.
The Company's long-term debt facilities include restrictive covenants
regarding maintaining consolidated earnings before interest, taxes,
depreciation and amortization above a certain level, maintaining an interest
coverage ratio, fixed charge coverage ratio and minimum net worth above
certain levels. Management believes that the Company is in compliance with all
such covenants at February 28, 1997.
Aggregate maturities and other required reductions of debt for the next five
fiscal years are: 1998--$14.1 million; 1999--$-0-; 2000--$-0-; 2001--$-0-; and
2002--$34.3 million.
Interest paid was $4.6 million, $4.8 million and $3.0 million for the years
ended February 28, 1995, February 29, 1996 and February 28, 1997,
respectively.
5. PREFERRED STOCK
On November 14, 1996, the Company redeemed all outstanding shares of its
Preferred Stock for $4 million. Accrued dividends of $424,000 were paid during
the twelve months ended February 28, 1997.
6. SHAREHOLDERS' EQUITY
COMMON STOCK
On April 16, 1996, the Company's Board of Directors ratified the grants to
the Company's Chief Executive Officer ("CEO") of options to purchase 468,750
shares of common stock. In addition, on May 5, 1996, the Company granted its
CEO options to purchase an additional 46,875 shares of common stock. All such
stock options are exercisable at a price of $6.40 per option, vest over a five
year period and are subject to the Company's Common Stock attaining specified
prices before certain shares vest. At February 28, 1997, 94,532 stock options
were vested. However, any unvested stock options immediately vest upon the
consummation of an initial public offering of the Company's common stock.
On May 6, 1996, the Company adopted a stock option plan for outside
directors which provides for the granting of 62,500 stock options to outside
members of the Company's Board of Directors. All options under this plan vest
upon grant. At February 28, 1997, 50,000 options were outstanding under the
plan at prices ranging from $6.40 to $9.60 per option.
F-13
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
6. SHAREHOLDERS' EQUITY--(CONTINUED)
On October 16, 1996, the Company amended its certificate of incorporation to
increase the authorized common stock to 13,750,000 shares, retain the par
value of $.01 per share, and to provide for a one share for two share reverse
common stock split.
On November 14, 1996, the Company acquired 1,250,000 shares of its
outstanding common stock for $8.40 per share for an aggregate cost of $10.5
million.
On December 13, 1996, the Company issued 107,738 shares of common stock for
$8.40 per share for aggregate proceeds of $905,000.
On February 4, 1997, the Company amended its employee stock option plan (the
"Employee Plan") to increase the number of options under such plan from
437,500 to 750,000. The stock options, when issued, vest incrementally over a
three year period and expire five years from the date of grant. At February
28, 1997, 450,687 options were outstanding under the plan at prices ranging
from $.88 to $9.60. Certain shareholders of the Company have agreed to sell
the Company up to an additional 393,417 shares of Common Stock as certain
other stock options are exercised at an amount equal to the exercise price of
such options.
STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the approximate fair value of the underlying
stock on the date of grant, no compensation expense is recognized.
The Company's Employee Plan provides that 750,000 stock options may be
granted to key employees, including officers and directors, to purchase common
stock at fair market value. Certain stockholders of the Company have agreed to
sell to the Company an equal number of shares of Common Stock as these stock
options are exercised at an amount equal to the option price. The stock
options vest incrementally over a three year period and expire five years from
the date granted. Additionally, the Company has a stock option plan which
provides for the granting of 62,500 stock options to outside directors and a
separate grant of 515,625 stock options to the Company's CEO.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options granted
subsequent to February 28, 1995 under the fair value method of that Statement.
The fair value of stock options granted during the years ended February 29,
1996 and February 28, 1997 was estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions: (i) no dividend
yield; (ii) expected volatility of .01%; (iii) risk-free interest rate ranging
from 5.52%--6.50%; and (iv) expected life ranging from 2 to 6 years.
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, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-14
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
6. SHAREHOLDERS' EQUITY--(CONTINUED)
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for earnings per
share information):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
<S> <C> <C>
Pro forma net income................................ $5,987 $10,314
====== =======
Pro forma net income applicable to common
shareholders........................................ $5,467 $ 9,890
====== =======
Pro forma earnings per share applicable to common
shareholders........................................ $ .83 $ 1.58
====== =======
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
February 28, 1995, its pro forma effect will not be fully reflected until
future years.
A summary of the status of the Company's stock option activity, and related
information for the years ended February 28, 1995, February 29, 1996, and
February 28, 1997 is as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, 1995 FEBRUARY 29, 1996 FEBRUARY 28, 1997
-------------------------- ------------------------- -------------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE EXERCISE OF AVERAGE EXERCISE OF AVERAGE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 344,229 $1.27 300,250 $2.39 349,125 $3.44
Granted............... 97,563 5.34 87,125 6.40 634,063 6.75
Exercised............. (9,583) 0.88 (30,417) 1.09 (4,083) 1.67
Canceled.............. (131,959) 1.75 (7,833) 5.19 (12,793) 4.03
-------- ------- -------
Outstanding at end of
year.................... 300,250 2.39 349,125 3.44 966,312 5.61
======== ======= =======
Exercisable at end of
year.................... 235,021 265,133 473,693
======== ======= =======
Options available for
future grant............ 127,667 48,375 305,230
======== ======= =======
Weighted average fair
value of options
granted during the
year................... $ 6.40 $ 6.75
======= =======
</TABLE>
The following table summarizes information about stock options outstanding
at February 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE FEBRUARY EXERCISE
RANGE OF EXERCISE PRICES FEBRUARY 28, 1997 LIFE PRICE 28, 1997 PRICE
- ------------------------ ----------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.88--1.20.............. 161,251 .6 years $ .90 161,251 $ .90
4.80--6.40.............. 711,623 3.8 6.26 264,635 6.04
8.00--9.60.............. 93,438 4.7 8.74 47,807 9.04
------- -------
966,312 473,693
======= =======
</TABLE>
F-15
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income tax assets at February 29, 1996 and February
28, 1997 are as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Accounts receivable reserves....................... $ 878 $ 1,157
Inventory reserves................................. 2,884 2,895
Extended product warranties........................ 1,064 1,183
Other.............................................. 2,065 1,933
Alternative minimum tax credit..................... 3,418 2,896
------- -------
Total deferred income tax assets..................... 10,309 10,064
Valuation allowance for deferred income tax assets... (8,556) (1,811)
------- -------
Net deferred income tax assets....................... $ 1,753 $ 8,253
======= =======
</TABLE>
The cumulative alternative minimum tax credit generated in prior years was
approximately $3.4 million and $2.9 million at February 29, 1996 and February
28, 1997, respectively, and can be utilized to offset regular federal income
tax in future periods. A deferred income tax asset valuation allowance was
provided at February 29, 1996 and February 28, 1997 as management determined
that it was "more likely than not" that such deferred income tax assets would
not be realized in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
The components of provision (benefit) for income taxes for the years ended
February 28, 1995, February 29, 1996 and February 28, 1997 are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal income taxes.................. $225 $ 70 $ 584
State, local, and foreign income and
franchise taxes....................... 350 280 324
---- ------- -------
575 350 908
Deferred:
Federal income taxes.................. -- (1,753) (6,500)
---- ------- -------
$575 $(1,403) $(5,592)
==== ======= =======
</TABLE>
F-16
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
7. INCOME TAXES (CONTINUED)
A reconciliation of the expected income tax expense at the statutory federal
rate to the Company's actual income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statutory expense....................... $ 1,834 $ 1,568 $ 1,893
State expense net of federal benefit.... 231 192 203
Change in valuation allowance........... (1,280) (2,735) (7,299)
Nondeductible items..................... (407) (381) (375)
Other, net.............................. 197 (47) (14)
------- ------- -------
$ 575 $(1,403) $(5,592)
======= ======= =======
</TABLE>
The Company paid approximately $528,000, $542,000 and $1,440,000 of income
taxes during the years ended February 28, 1995, February 29, 1996 and February
28, 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company leases certain computer equipment under long-term capital
leases. The cost of computer equipment under capital leases included in
property and equipment was $1,672,522 at February 29, 1996 and February 28,
1997.
Future minimum lease payments under capital leases at February 28, 1997 were
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Years ending February
1998........................................................... $412
1999........................................................... 35
----
Total minimum lease payments..................................... 447
Less amounts representing interest............................... (5)
----
Present value of net minimum lease payments...................... 442
Current portion of capital leases................................ (363)
----
Total non-current portion of capital leases...................... $ 79
====
</TABLE>
Amortization of capital leases is included in depreciation expense on the
statements of income.
OPERATING LEASES
The Company leases office and warehouse facilities and equipment under
operating leases. Rental expense for the years ended February 28, 1995,
February 29, 1996 and February 28, 1997 approximated $9.5, $9.3 and $10.2
million, respectively. Future minimum lease commitments under these agreements
as of February 28, 1997 are as follows: 1998--$10.7 million; 1999--$6.3
million; 2000--$4.2 million; 2001--$4.1 million; 2002--$1.1 million, and
$648,000 thereafter.
F-17
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS (CONTINUED)
On November 18, 1996, United Refrigeration, Inc. ("United"), a competitor of
the Company, filed suit against Pameco in the United States District Court for
the Eastern District of Pennsylvania claiming that Pameco had tortiously
interfered with United's alleged contract to purchase Sid Harvey's
southeastern business operations (the "Southeastern Assets"). United asserted
that beginning on or about August 23, 1996, it met with Sid Harvey and
thereafter negotiated an agreement (allegedly finalized on or about October
24, 1996) to purchase the Southeastern Assets for approximately $26 million
and that Pameco tortiously interfered with this alleged contract by offering
"substantial inducements" to Sid Harvey and by itself purchasing the
Southeastern Assets. In the alternative, United claims that, should the
agreement be deemed unenforceable, Pameco tortiously interfered with United's
prospective contractual relations with Sid Harvey. On February 18, 1997,
United filed an amended complaint adding Sid Harvey as a defendant. In the
amended complaint, United claims that Sid Harvey (i) breached its agreement to
sell the Southeastern Assets to United; (ii) committed fraud in the inducement
of that alleged contract; (iii) negligently misrepresented certain facts
concerning the sale of the operations and Sid Harvey's intention to carry out
the sale of those assets and (iv) was unjustly enriched by certain information
obtained from United during the United/Sid Harvey negotiations.
Although the amended complaint does not demand specified damages, it asserts
that United should recover the "loss of its bargain," which United estimates
to be $11.4 million. Upon consummation of the Southeastern Assets acquisition,
Pameco agreed, based on certain written representations made by Sid Harvey
about the status of its discussions with United, to indemnify Sid Harvey
against all liabilities arising out of any action filed by United in
connection with the purchase of the Southeastern Assets.
On July 5, 1996, three former employees filed suit against Pameco and a
Company supervisor in the Superior Court of the State of California, County of
Stanislaus, alleging various tortious acts and that the Company maintained a
hostile work environment. The suit also asserts that in permitting the alleged
harassment of the plaintiffs by its supervisor that Pameco violated the
California Fair Employment Housing Act by failing to provide a harassment free
work place. The plaintiffs have cumulatively sought $1.8 million in damages,
including $1.5 million in punitive damages, from Pameco.
The Company is involved in other claims and legal proceedings which have
arisen in the ordinary course of its business. The Company intends to
vigorously defend all such claims and does not believe any such matters or the
actions described above will have a material adverse effect on the Company's
results of operations or financial condition.
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan which covers a majority of its
employees. The plan provides for voluntary employee contributions. Employer
contributions under plan provisions are discretionary. Pameco contributed
$58,000, $104,000 and $97,000 to the plan for the years ended February 28,
1995, February 29, 1996 and February 28, 1997, respectively.
F-18
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 28, 1997
9. EMPLOYEE BENEFIT PLAN (CONTINUED)
On February 28, 1997, Pameco declared and accrued a cash bonus to certain
executives of approximately $2.2 million for prior service. Payment of such
bonus will occur over a three-year period ending February 29, 2000.
10. SUBSEQUENT EVENTS
The Company was formed in March 1997. On June , 1997, Pameco Holdings Inc.
("PHI") and Pameco Corporation, both Delaware corporations, were merged with
and into the Company, and in connection therewith the shareholders of PHI
received 1.25 shares of the Company's Class A Common Stock or Class B Common
Stock, as agreed upon among themselves, for each share of Class A Common Stock
and Class B Common Stock of PHI held by them immediately prior to the merger.
The Company's Class A Common Stock entitles its holder to one vote per share,
whereas the Class B Common Stock generally entitles its holder to ten votes
per share.
Prior to the IPO certain shareholders of the Company agreed to sell the
Company an equal number of shares of Common Stock as certain stock options
were exercised at an amount equal to the exercise price. After the completion
of the IPO the Company will repurchase all such shares of its Common Stock
from certain investors. Such shares will be retired upon acquisition. Upon
exercise of these stock options, the Company will issue its Common Stock for
such exercises.
F-19
<PAGE>
The following represents a selection of the product line distributed by the
Company:
[Pictures of products manufactured by Copeland, DuPont, Honeywell, Inter-City
Products and Manitowoc, logos for the following manufcturers: Ruud, Rheem, Heil,
White-Rodgers, Nu-Calgon, Scotsman, Thomas & Betts, Atco, MagneTek, Hart &
Cooley, Heatcraft, Inc., Johnson Controls, Owens/Corning, Sporlan Valve Company,
Allied Signal Chemicals, Mars, Superior Valve Company, Mueller Industries, Inc.,
Robinair, Tecumseh, Research Products Corporation, KMP and J.W. Harris, and the
logo for ThermalZone].
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 17
Dilution................................................................. 17
Capitalization........................................................... 18
Selected Consolidated Financial and Other Operating Data ................ 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 39
Certain Transactions..................................................... 49
Principal and Selling Shareholders....................................... 50
Description of Capital Stock............................................. 52
Description of Certain Indebtedness...................................... 56
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 59
Experts.................................................................. 61
Legal Matters............................................................ 61
Available Information.................................................... 61
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,578,644 SHARES
LOGO
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.
SCHRODER WERTHEIM & CO.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the shares of
Class A Common Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $ 18,706
NASD Filing Fee.................................................. $ 7,027
NYSE listing fee................................................. $ 84,600
Printing and Mailing............................................. $ 120,000*
Accounting Fees and Expenses..................................... $ 200,000*
Blue Sky Fees and Expenses....................................... $ 5,000*
Counsel Fees and Expenses........................................ $ 200,000*
Miscellaneous.................................................... $ 14,671*
---------
Total.......................................................... $ 650,000*
=========
</TABLE>
- ---------------------
* Estimate
The Selling Shareholders will pay all underwriting discounts and commissions
and transfer taxes, if any, relating to the sale of the Selling Shareholders'
shares in the Offering.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The underwriting agreement provides for indemnification by the Underwriters
of the Company and the Selling Shareholders and by the Company and the Selling
Shareholders of the Underwriters, for certain liabilities, including
liabilities arising under the Securities Act of 1933 (the "Securities Act"),
and affords certain rights of contribution with respect thereto.
As provided under Georgia law, the Company's Articles of Incorporation
provide that a director shall not be personally liable to the Company or its
shareholders for monetary damages for breach of duty of care or any other duty
owed to the Company as a director, except that such provisions shall not limit
the liability of a director (a) for any appropriation, in violation of his
duties, of any business opportunity of the Company; (b) for acts or omissions
which involve intentional misconduct or a knowing violation of law; (c) for
unlawful corporate distributions or (d) for any transactions from which the
director receives an improper benefit.
Under Article V of the Company's Bylaws, the Registrant is required to
indemnify its directors and officers to the fullest extent permitted by
Georgia law. The Georgia Business Corporation Code provides that a corporation
may indemnify its directors, officers and agents against judgments, fines,
penalties, amounts paid in settlement and expenses, including attorneys' fees,
resulting from various types of legal actions or proceedings if the actions of
the party being indemnified meet the standards of conduct specified therein.
Determinations concerning whether the applicable standard of conduct has been
met can be made by (a) a majority of the disinterested directors; (b) a
majority of a committee of disinterested directors; (c) independent legal
counsel or (d) an affirmative vote of a majority of shares held by the
disinterested shareholders. No indemnification may be made to or on behalf of
a corporate director, officer, employee or agent (i) in connection with a
proceeding by or in right of the Company in which such person was adjudged
liable to the Company or (ii) in connection with any other proceeding in which
said person was adjudged liable on the basis that personal benefit was
improperly received by him.
The Company has entered into Indemnification Agreements with certain of its
directors and officers (the "Indemnified Parties"). Under the terms of the
Indemnification Agreements, the Company is required to indemnify the
Indemnified Parties against certain liabilities arising out of their service
for the Company. The
II-1
<PAGE>
Indemnification Agreements require the Company (i) to indemnify each
Indemnified Party to the fullest extent permitted by law; (ii) to provide
coverage for each Indemnified Party under the Company's directors and officers
liability insurance policy and (iii) to advance certain expenses incurred by
an Indemnified Party. The Indemnification Agreements provide limitations on
the Indemnified Party's rights to indemnification in certain circumstances.
The Company's directors and officers are insured against losses arising from
any claim against them as such for wrongful acts or omissions, subject to
certain limitations.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant was incorporated in March 1997.
During the past three years, the following persons were issued Class A
Common Stock of the Registrant's predecessor on the date and for the
consideration referenced below:
<TABLE>
<CAPTION>
NAME NO. SHARES DATE OF ISSUANCE CONSIDERATION
---- ---------- ---------------- -------------
<S> <C> <C> <C>
*Steve Ferguson ..................... 375 05/28/97 $ 330.00
*Paul J. Smith ...................... 625 05/21/97 $ 4,000.00
*Al J. Lendino ...................... 5,000 05/16/97 $ 4,400.00
*J. W. Leneave ...................... 6,250 05/02/97 $ 5,500.00
*Ronald T. Nakamura ................. 5,000 05/02/97 $ 4,400.00
*David P. Sattertahware ............. 3,125 05/02/97 $ 2,750.00
*Robert Ellis ....................... 375 04/14/97 $ 330.00
*Gary Wadsworth ..................... 1,562 04/14/97 $ 1,375.00
*Jesus B. Pizarro ................... 5,000 04/10/97 $ 4,400.00
*Charles Sorrentino.................. 21,875 04/07/97 $140,000.00
*J. Christopher van Ee............... 19,031 04/07/97 $ 30,100.00
*Mark L. Davison .................... 1,875 04/04/97 $ 15,000.00
*Phil Filer ......................... 3,987 04/04/97 $ 19,140.00
*Don Kelly .......................... 22,916 04/04/97 $ 27,580.00
*James R. Balkcom, Jr. .............. 12,500 04/03/97 $100,000.00
*Theodore R. Kallgren ............... 17,312 04/03/97 $ 39,000.00
*Jeffrey S. Ruege ................... 19,997 04/03/97 $ 39,638.00
*Brian Silva ........................ 375 04/03/97 $ 330.00
*Walter Wilcox ...................... 6,250 04/03/97 $ 5,500.00
*Mark Graham ........................ 12,362 04/02/97 $ 44,620.00
*Tom Jacques ........................ 7,625 04/01/97 $ 41,350.00
*Mary McCulley ...................... 2,750 04/01/97 $ 13,200.00
*Jeffrey Ward ....................... 3,525 03/31/97 $ 15,110.00
*Paul Bois .......................... 14,375 03/27/97 $ 12,650.00
*Gerald V. Gurbacki ................. 76,875 03/20/97 $492,000.00
James R. Balkcom, Jr. .............. 62,500 03/10/97 $600,000.00
*James Giolas ....................... 5,000 03/10/97 $ 4,400.00
*Steve Pavlichek..................... 416 01/22/97 $ 2,664.00
*Patricia Fowler..................... 541 12/31/96 $ 1,394.00
Michael Bulkin and Rosemary E.
Bulkin, as joint tenants with the
right of survivorship............... 12,500 12/09/96 $105,000.00
James R. Balkcom, Jr. .............. 47,618 12/03/96 $399,997.50
Linda P. Balkcom.................... 35,713 11/28/96 $299,995.50
Mary Kathryn Balkcom................ 5,952 11/28/96 $ 50,001.00
Julie Balkcom Green................. 5,952 11/28/96 $ 50,001.00
*Ben Dacke........................... 3,125 07/09/96 $ 2,750.00
*Jill Lange.......................... 2,291 10/12/95 $ 8,551.00
*Thomas Totte........................ 6,250 08/01/95 $ 5,500.00
*Stuart Rogers....................... 21,875 04/14/95 $ 19,250.00
*James D. Askren, II ................ 9,582 12/07/94 $ 8,433.15
</TABLE>
- ---------------------
* Pursuant to the exercise of stock options.
II-2
<PAGE>
The sales to James Balkcom (except for shares issued to him on April 3,
1997), Michael and Rosemary Bulkin, Linda Balkcom, Mary Kathryn Balkcom and
Julie Balkcom Green were isolated private transactions not involving a public
offering and therefore were exempt from registration under Section 4(2) of the
Securities Act. The remaining sales were made pursuant to the exercise of
stock options under the Company's benefit plans, which transactions were
exempt from registration pursuant to Rule 701 promulgated under the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
***1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Articles of Incorporation of the Registrant
*3.2 Amended and Restated Bylaws of the Registrant
*3.3 Agreement and Plan of Merger by and among Pameco Holdings, Inc., a
Delaware corporation, Pameco Corporation, a Delaware corporation, and
the Registrant, dated April , 1997
*4.1 Form of Class A Common Stock Certificate of the Registrant
*5.1 Opinion of Kilpatrick Stockton LLP
*10.1 Asset Purchase Agreement between the Registrant and Sid Harvey
Industries, Inc., dated November 1, 1996
*10.2 Letter Agreement between the Registrant and Sid Harvey Industries,
Inc., dated November 1, 1996
*10.3 Agreement for Purchase and Sale of Certain Assets between the
Registrant and Chase Supply Company of Chicago, dated May 1, 1996
*10.4 Form of Indemnification Agreement between the Registrant and its
directors and officers
*10.5 Employee Stock Option Plan I
*10.6 Employee Stock Option Plan II
*10.7 Stock Option Agreement between the Registrant and Gerald V. Gurbacki,
dated May 6, 1996
*10.8 Non-Employee Directors Stock Option Plan
*10.9 Employee Stock Purchase Plan
*10.10 Credit Agreement among the Registrant, General Electric Capital
Corporation and the Lenders named therein, dated March 19, 1992
*10.11 Amendment Agreement No. 6 to Credit Agreement, dated April 29, 1996
*10.12 Pledge Agreement between the Registrant and General Electric Capital
Corporation dated
April 29, 1992
*10.13 Waiver and Seventh Amendment to Credit Agreement, dated November 1,
1996
*10.14 Eighth Amendment to Credit Agreement, dated January 24, 1997
*10.15 Waiver and Ninth Amendment to Credit Agreement, dated February ,
1997
*10.16 Receivables Purchase and Servicing Agreement among Pameco
Securitization Corporation, Redwood Receivables Corporation, the
Registrant and General Electric Capital Corporation, dated April 29,
1996
*10.17 Receivables Transfer Agreement between the Registrant and Pameco
Securitization Corporation, dated April 29, 1996
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
-------- ----------------------
<C> <S>
*10.18 Annex X to Receivables Transfer Agreement and Receivables Purchase
and Servicing Agreement, Definitions and Interpretations, dated
April 29, 1996
*10.19 Amendment No. 1 to Securitization Agreements among Pameco
Securitization Corporation, the Registrant, Redwood Receivables
Corporation and General Electric Capital Corporation, dated January
24, 1997
*10.20 Employment Agreement between the Registrant and Gerald V. Gurbacki,
dated March 1, 1996
*10.21 Letter Agreement between the Registrant and Three Cities Research,
Inc., dated March 1, 1997
*10.22 Agreement for Purchase of Shares of Pameco Holdings, Inc. between
the Registrant and Sofitam S.A., dated November 14, 1996
*10.23 Stockholders' Agreement among the Registrant, the Investor Group,
The Bank of Nova Scotia, Brian R. Esher and certain employees of the
Registrant, dated March 19, 1992, as amended
*11.1 Computation of Historical Net Income Per Share
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Kilpatrick Stockton LLP (See Exhibit 5.1)
***23.2 Consent of Ernst & Young LLP
*24.1 Powers of Attorney (see Signature Page)
*27 Financial Data Schedule
</TABLE>
- ---------------------
*Previously filed
**To be filed by amendment
***Filed herewith
(b) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted as the required information is inapplicable
or is presented in the financial statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question as to
whether such indemnification by it is against public policy as expressed in
the Securities Act, and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY
OF ATLANTA, STATE OF GEORGIA, ON THE 30TH DAY OF MAY, 1997.
New Pameco Georgia Corporation
By: _________________________________
THEODORE R. KALLGREN CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
ON THE 30TH DAY OF MAY, 1997, IN THE CAPACITIES INDICATED.
SIGNATURE POSITION
* Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
GERALD V. GURBACKI
Chief Financial Officer (Principal
Financial and Accounting Officer)
- -------------------------------------
THEODORE R. KALLGREN
* Chairman of the Board
- -------------------------------------
JAMES R. BALKCOM, JR.
* Director
- -------------------------------------
G. THOMAS BRASWELL, JR.
* Director
- -------------------------------------
MICHAEL H. BULKIN
* Director
- -------------------------------------
EARL DOLIVE
II-6
<PAGE>
SIGNATURE POSITION
* Director
- -------------------------------------
H. WHITNEY WAGNER
* Director
- -------------------------------------
THOMAS G. WELD
*
- -------------------------------------
THEODORE R. KALLGREN
Pursuant to power of attorney
previously filed
II-7
<PAGE>
SCHEDULE II
PAMECO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND NET OTHER AT END OF
OF YEAR EXPENSES DEDUCTIONS(2) ADDITIONS(3) YEAR
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts(1):
For the year ended
February 28, 1995.... $2,288 $1,743 $1,906 -- $2,125
For the year ended
February 29, 1996.... $2,125 $1,905 $2,152 -- $1,878
For the year ended
February 28, 1997.... $1,878 $1,792 $1,135 -- $2,535
Inventory reserves(1):
For the year ended
February 28, 1995.... $3,847 $454 $907 -- $3,394
For the year ended
February 29, 1996.... $3,394 $1,146 $1,583 -- $2,957
For the year ended
February 28, 1997.... $2,957 $767 $1,327 $1,795 $4,192
</TABLE>
- ---------------------
(1) Deducted from the related asset account.
(2) Relates to amounts charged off during the period.
(3) Relates to reserves established in connection with the purchase price
allocation related to the Sid Harvey acquisition.
<PAGE>
The following report is in the form that will be signed upon completion of the
restatement of capital accounts and the Merger described in the last
paragraph of Note 9 to the financial statements.
ERNST & YOUNG LLP
Atlanta, Georgia
March 26, 1997
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Pameco Corporation as
of February 28, 1995 and February 29, 1996, and for each of the three years in
the period ended February 29, 1996, and have issued our report thereon dated
April 26, 1996 (except for Note 8 as to which the date is May 2, 1996, and
except for the last paragraph of Note 9 as to which the date is ______, 1997),
included elsewhere in this Registration Statement. Our audits also included the
financial statement schedule listed in Item 16(a) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
April ______, 1997
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ----
<C> <S> <C>
***1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Articles of Incorporation of the
Registrant
*3.2 Amended and Restated Bylaws of the Registrant
*3.3 Agreement and Plan of Merger by and among Pameco Holdings,
Inc., a Delaware corporation, Pameco Corporation, a Delaware
corporation, and the Registrant, dated April , 1997
*4.1 Form of Class A Common Stock Certificate of the Registrant
*5.1 Opinion of Kilpatrick Stockton LLP
*10.1 Asset Purchase Agreement between the Registrant and Sid Harvey
Industries, Inc., dated November 1, 1996
*10.2 Letter Agreement between the Registrant and Sid Harvey
Industries, Inc., dated November 1, 1996
*10.3 Agreement for Purchase and Sale of Certain Assets between the
Registrant and Chase Supply Company of Chicago, dated May 1,
1996
*10.4 Form of Indemnification Agreement between the Registrant and
its directors and officers
*10.5 Employee Stock Option Plan I
*10.6 Employee Stock Option Plan II
*10.7 Stock Option Agreement between the Registrant and Gerald V.
Gurbacki, dated May 6, 1996
*10.8 Non-Employee Directors Stock Option Plan
*10.9 Employee Stock Purchase Plan
*10.10 Credit Agreement among the Registrant, General Electric
Capital Corporation and the Lenders named therein, dated March
19, 1992
*10.11 Amendment Agreement No. 6 to Credit Agreement, dated April 29,
1996
*10.12 Pledge Agreement between the Registrant and General Electric
Capital Corporation dated April 29, 1992
*10.13 Waiver and Seventh Amendment to Credit Agreement, dated
November 1, 1996
*10.14 Eighth Amendment to Credit Agreement, dated January 24, 1997
*10.15 Waiver and Ninth Amendment to Credit Agreement, dated February
, 1997
*10.16 Receivables Purchase and Servicing Agreement among Pameco
Securitization Corporation, Redwood Receivables Corporation,
the Registrant and General Electric Capital Corporation, dated
April 29, 1996
*10.17 Receivables Transfer Agreement between the Registrant and
Pameco Securitization Corporation, dated April 29, 1996
*10.18 Annex X to Receivables Transfer Agreement and Receivables
Purchase and Servicing Agreement, Definitions and
Interpretations, dated April 29, 1996
*10.19 Amendment No. 1 to Securitization Agreements among Pameco
Securitization Corporation, the Registrant, Redwood
Receivables Corporation and General Electric Capital
Corporation, dated January 24, 1997
*10.20 Employment Agreement between the Registrant and Gerald V.
Gurbacki, dated March 1, 1996
*10.21 Letter Agreement between the Registrant and Three Cities
Research, Inc., dated March 1, 1997
*10.22 Agreement for Purchase of Shares of Pameco Holdings, Inc.
between the Registrant and Sofitam S.A., dated November 14,
1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT PAGE
-------- ---------------------- ----
<C> <S> <C>
*10.23 Stockholders' Agreement among the Registrant, the Investor
Group, The Bank of Nova Scotia, Brian R. Esher and certain
employees of the Registrant, dated March 19, 1992, as amended
*11.1 Computation of Historical Net Income Per Share
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Kilpatrick Stockton LLP (See Exhibit 5.1)
***23.2 Consent of Ernst & Young LLP
*24.1 Powers of Attorney (see Signature Page)
*27 Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed
** To be filed by amendment
*** Filed herewith
<PAGE>
EXHIBIT 1.1
3,578,644 Shares
PAMECO CORPORATION
Class A Common Stock
UNDERWRITING AGREEMENT
June __, 1997
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.
SCHRODER WERTHEIM & CO. INCORPORATED
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Pameco Corporation, a Georgia corporation (the "Company"), and the
stockholders of the Company named in Schedule II hereto, (collectively, the
"Selling Stockholders"), severally propose to sell an aggregate of 3,578,644
shares of Class A Common Stock, par value $0.01 per share, of the Company (the
"Firm Shares"), to the several underwriters named in Schedule I hereto (the
"Underwriters"). The Firm Shares consist of 3,000,000 shares to be issued and
sold by the Company and 578,644 outstanding shares to be sold by the Selling
Stockholders. The Company also proposes to issue and sell to the several
Underwriters not more than 563,796 additional shares of Class A Common Stock,
par value $0.01 per share, of the Company (the "Additional Shares"), if
requested by the Underwriters as provided in Section 2 hereof. The Firm Shares
and the Additional
<PAGE>
Shares are herein collectively called the Shares. The shares of Class A Common
Stock, par value $0.01 per share, of the Company to be outstanding after giving
effect to the sales contemplated hereby are hereinafter referred to as the Class
A Common Stock. The Class A Common Stock and the Class B Common Stock, par
value $0.01 per share, of the Company are hereinafter collectively referred to
as the Common Stock. The Company and the Selling Stockholders are hereinafter
collectively called the Sellers.
1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form S-1 including a prospectus relating to
the Shares, which may be amended. The registration statement as amended at the
time when it becomes effective, including a registration statement (if any)
filed pursuant to Rule 462(b) under the Act increasing the size of the offering
registered under the Act and information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A or
Rule 434 under the Act, is hereinafter referred to as the Registration
Statement; and the Prospectus (including any prospectus subject to completion
and any term sheet meeting the requirements of Rule 434(b) under the Act, taken
together as the prospectus provided by the Company to meet the requirements of
Section 10(a) of the Act) in the respective forms first used to confirm sales of
Shares are hereinafter referred to as the Prospectus.
2. Agreements to Sell and Purchase. On the basis of the representations
-------------------------------
and warranties contained in this Agreement, and subject to its terms and
conditions, (i) the Company agrees to issue and sell 3,000,000 Firm Shares, (ii)
each Selling Stockholder agrees, severally and not jointly, to sell the number
of Firm Shares set forth opposite such Selling Stockholder's name in Schedule II
hereto and (iii) each Underwriter agrees, severally and not jointly, to purchase
from each Seller at a price per share of $______ (the "Purchase Price") the
number of Firm Shares (subject to such adjustments to eliminate fractional
shares as you may determine) which
<PAGE>
bears the same proportion to the total number of Firm Shares to be sold by such
Seller as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell up to 563,796 Additional Shares and (ii) the Underwriters shall
have the right to purchase, severally and not jointly, up to an aggregate
563,796 Additional Shares from the Company at the Purchase Price. Additional
Shares may be purchased solely for the purpose of covering over-allotments made
in connection with the offering of the Firm Shares. The Underwriters may
exercise their right to purchase Additional Shares in whole or in part from time
to time by giving written notice thereof to the Company within 30 days after the
date of this Agreement. You shall give any such notice on behalf of the
Underwriters and such notice shall specify the aggregate number of Additional
Shares to be purchased pursuant to such exercise and the date for payment and
delivery thereof. The date specified in any such notice shall be a business day
(i) no earlier than the Closing Date (as hereinafter defined), (ii) no later
than ten business days after such notice has been given and (iii) no earlier
than two business days after such notice has been given. If any Additional
Shares are to be purchased, each Underwriter, severally and not jointly, agrees
to purchase from the Company the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) which bears the
same proportion to the total number of Additional Shares to be purchased from
the Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
The Selling Stockholders hereby agree, severally and not jointly, and the
Company hereby agrees, not to offer, sell, pledge, contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of
directly or indirectly any shares of common stock of the Company or any
securities convertible into or exercisable or exchangeable for common stock of
the Company (collectively, "Common") or
<PAGE>
in any other manner transfer all or a portion of the economic consequences
associated with the ownership of any Common (regardless of whether any of the
foregoing transactions is to be settled by the delivery of Common, in cash or
otherwise), except to the Underwriters pursuant to this Agreement, for a period
of 180 days after the date of the Prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation, and the Company shall,
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) each of the directors and officers of the Company and (ii) each
stockholder listed on Annex I hereto to the effect that such person will not
engage in any of the foregoing transactions with respect to any Common, in each
case beneficially owned by such person during such period. Notwithstanding the
foregoing, during such 180 period (i) the Company may grant stock options
pursuant to the Company's existing stock option plan, (ii) the Company may issue
shares of Common upon the exercise of an option or warrant or the conversion of
a security outstanding on the date hereof; (iii) each of the Company's directors
and officers, each stockholder listed on Annex I, and, during the period after
Closing, each Selling Stockholder, may transfer Common stock by way of off-
market transfers to those of their respective affiliates (as that term is
defined in Rule 144 under the Act) which agree in writing with the Underwriters
to be bound by the provisions of this paragraph; and (iv) each of the Company's
directors and officers, each stockholder listed on Annex I, and, during the
period after Closing, each Selling Stockholder, may pledge Common to any person
which, prior to such pledge taking effect, agrees to be bound by the provisions
of this paragraph.
3. Terms of Public Offering. The Sellers are advised by you that the
------------------------
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the execution and delivery of this Agreement as in
your judgment is advisable and (ii) initially to offer the Shares upon the terms
set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and payment for
--------------------
the Firm Shares shall be made at 9:00 A.M., Atlanta time, on June __, 1997 (the
"Closing Date"), at the offices of Kilpatrick Stockton
<PAGE>
LLP at 1100 Peachtree Street, Atlanta, Georgia 30309, or at such other place as
you and the Company shall designate. The Closing Date and the location of
delivery of and the form of payment for the Firm Shares may be varied by
agreement between you and the Sellers.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at such place as you shall designate
at 9:00 A.M., New York City time, on the date specified in the applicable
exercise notice given by you pursuant to Section 2 (an "Option Closing Date").
Any such Option Closing Date and the location of delivery of and the form of
payment for such Additional Shares may be varied by agreement between you and
the Company.
Certificates for the Shares shall be registered in such names and issued in
such denominations as you shall request in writing not later than two full
business days prior to the Closing Date or an Option Closing Date, as the case
may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date or an Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, with any transfer taxes
thereon duly paid by the respective Sellers, for the respective accounts of the
several Underwriters, against payment to the Sellers of the Purchase Price
therefor by wire transfer of Federal or other funds immediately available in New
York City.
5. Agreements of the Company. The Company agrees with you:
-------------------------
(a) To advise you promptly and, if requested by you, to confirm such advice
in writing, (i) when the Registration Statement has become effective and when
any post-effective amendment to it becomes effective, (ii) of any request by the
Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information, (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any
<PAGE>
jurisdiction, or the initiation of any proceeding for such purposes (iv) if the
Company is required to file a registration statement pursuant to Rule 462(b)
under the Act increasing the size of the offering (a "Rule 462(b) Registration
Statement") after the effectiveness of this Agreement, when the Rule 462(b)
Registration Statement has become effective and (v) of the happening of any
event during the period referred to in paragraph (d) below which makes any
statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires the making of any additions to or changes in
the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, the Company
will use its best efforts to obtain the withdrawal or lifting of such order at
the earliest possible time.
(b) To furnish to you, without charge, 4 signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Registration Statement and the Prospectus in a form
approved by you and not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or to
make any amendment or supplement to the Prospectus including the issuance or
filings of any term sheet within the meaning of Rule 434 of which you shall not
previously have been advised or to which you shall reasonably object; and to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment or supplement to the Registration Statement or the Prospectus
including the issuance or filings of any term sheet within the meaning of Rule
434 which may be necessary or advisable in connection with the distribution of
the Shares by you, and to use its best efforts to cause any such amendment to
the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M. New York City time on the business day next
succeeding the date of this Agreement, and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales of the Shares by an
<PAGE>
Underwriter or a dealer, to furnish to each Underwriter and dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in paragraph (d) any event shall occur
as a result of which, in the opinion of counsel for the Underwriters it becomes
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if it is necessary to amend or supplement the
Prospectus to comply with any law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to such dealers as you shall specify, such number of copies
thereof as such Underwriter or dealers may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such qualification in effect so long as required
for distribution of the Shares and to file such consents to service of process
or other documents as may be necessary in order to effect such registration or
qualification.
(g) To mail and make generally available to its stockholders as soon as
reasonably practicable an earnings statement covering a period of at least
twelve months after the effective date of the Registration Statement (but in no
event commencing later than 90 days after such date) which shall satisfy the
provisions of Section 11(a) of the Act, and to advise you in writing when such
statement has been so made available.
(h) During the period of five years after the date of this Agreement, (i)
to mail as soon as reasonably practicable after the end of each fiscal year to
<PAGE>
the record holders of its Common Stock a financial report of the Company and its
subsidiaries on a consolidated basis (and a similar financial report of all
unconsolidated subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
shareholders' equity as of the end of and for such fiscal year, together with
comparable information as of the end of and for the preceding year, certified by
independent certified public accountants, and (ii) to mail and make generally
available as soon as practicable after the end of each quarterly period (except
for the last quarterly period of each fiscal year) to such holders, a
consolidated balance sheet, a consolidated statement of operations and a
consolidated statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of and for such period, and
for the period from the beginning of such year to the close of such quarterly
period, together with comparable information for the corresponding periods of
the preceding year.
(i) During the period referred to in paragraph (h), to furnish to you as
soon as available a copy of each report or other publicly available information
of the Company mailed to the holders of Common Stock or filed with the
Commission and such other publicly available information concerning the Company
and its subsidiaries as you may reasonably request.
(j) If the Registration Statement at the time of the execution and delivery
of this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(k) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement
including (i) the fees, disbursements and expenses of the Company's counsel and
<PAGE>
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees or expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing prior to
or during the period specified in paragraph (d), including the mailing and
delivering of copies thereof to the Underwriters and dealers in the quantities
specified herein, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) all costs of printing or producing this Agreement
and any other documents in connection with the offering, purchase, sale or
delivery of the Shares, (iv) all expenses in connection with the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of the several states and the cost of printing or producing any Preliminary
and Supplemental Blue Sky Memoranda in connection therewith (including the
filing fees and fees and disbursements of counsel for the Underwriters in
connection with such registration or qualification and memoranda relating
thereto), (v) the filing fees and disbursements of counsel for the Underwriters
in connection with the review and clearance of the offering of the Shares by the
National Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on Form
8-A relating to the Class A Common Stock and all costs and expenses incident to
the listing of the Shares on the New York Stock Exchange and any other national
securities exchanges and foreign stock exchanges and, if applicable, the
quotation of the Shares on the NASDAQ National Market, (vii) the cost of
printing certificates representing the Shares, (viii) the costs and charges of
any transfer agent, registrar or depositary, and (ix) and all other costs and
expenses incident to the performance of the obligations of the Sellers hereunder
for which provision is not otherwise made in this Section 3.
(l) To use its best efforts to list, subject to notice of issuance, the
Shares on the New York Stock Exchange and to maintain the listing of the Shares
<PAGE>
on the New York Stock Exchange for a period of three years after the effective
date of the Registration Statement.
(m) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
6. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each Underwriter that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such part became
effective, did not contain and each such part, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will comply in
all material respects with the Act and (iii) the Prospectus does not contain
and, as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph (b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, and each Registration Statement filed pursuant to Rule
<PAGE>
462(b) under the Act, if any, complied when so filed in all material respects
with the Act and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph (c) do not apply to statements or omissions in any preliminary
prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(d) Each of the Company and Pameco Securitization Corporation (the
"Subsidiary") has been duly incorporated, is validly existing as a corporation
in good standing under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as described in the
Prospectus and to own, lease and operate its properties, and each is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
and the Subsidiary, taken as a whole. The Subsidiary is the only subsidiary of
the Company.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or the Subsidiary related to or entitling any person to purchase or
otherwise to acquire any shares of the capital stock of the Company or any of
its subsidiaries, except as otherwise disclosed in the Registration Statement.
All of the outstanding shares of capital stock of, or other ownership interests
in, the Subsidiary have been duly authorized and validly issued and are fully
paid and non-assessable, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any nature.
(f) All the outstanding shares of capital stock of the Company (including
the Shares to be sold by the Selling Stockholders) have been duly authorized and
<PAGE>
validly issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights; and the Shares to be issued and sold by the
Company hereunder have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company, including the Common
Stock, conforms as to legal matters to the description thereof contained in the
Prospectus.
(h) Neither the Company nor the Subsidiary is in violation of its
respective charter, articles of incorporation or by-laws or in default in the
performance of any obligation, agreement, covenant or condition contained in any
indenture, loan or credit agreement, mortgage, lease or other agreement or
instrument that is material to the Company and the Subsidiary, taken as a whole,
to which the Company or the Subsidiary is a party or by which it or the
Subsidiary or their respective property is bound.
(i) The execution, delivery and performance of this Agreement by the
Company, compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of or qualification with any
court, regulatory body, administrative agency or other governmental body (except
as such may be required under the securities or Blue Sky laws of the various
states) and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter, articles of incorporation or by-
laws of the Company or the Subsidiary or any indenture, loan or credit
agreement, mortgage, lease or other agreement or instrument to which it or the
Subsidiary is a party or by which it or any of its subsidiaries or their
respective property is bound, or violate or conflict with any laws, rules,
regulations, judgments, orders or decrees of any court, governmental agency or
body having jurisdiction over the Company, the Subsidiary or their respective
<PAGE>
property, except those that would not have, singly or in the aggregate, a
material adverse effect on the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and the
Subsidiary, taken as a whole or otherwise affect consummation of the
transactions contemplated hereby (each, a "Material Adverse Effect").
(j) There are no legal or governmental proceedings pending or threatened to
which the Company or the Subsidiary is a party or to which any of their
respective property is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described; nor are there
any statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(k) Neither the Company nor the Subsidiary has violated any foreign,
federal, state or local law or regulation relating to the protection of human
health and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), nor any federal or state law
relating to discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions of the
Employee Retirement Income Security Act of 1974 or the rules and regulations
promulgated thereunder, except for such violations which singly and in the
aggregate would not result in any material adverse change in the business,
prospects, financial condition or results of operation of the Company and the
Subsidiary, taken as a whole.
(l) Each of the Company and the Subsidiary has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("permits"), including, without limitation, under any applicable Environmental
<PAGE>
Laws, as are necessary to own, lease and operate its respective properties and
to conduct its business except where failure to have such permits would not
have, singly or in the aggregate, a Material Adverse Effect; each of the Company
and the Subsidiary is in compliance with the terms and conditions of all such
permits and no event has occurred which allows, or after notice or lapse of time
or both would allow, revocation or termination thereof or results or, after
notice or lapse of time or both, would result in any other impairment of the
rights of the holder of any such permit; such permits contain no restrictions
that are materially burdensome to the Company or the Subsidiary; except where
such failure to have, or comply with the terms or conditions of, such permits,
the occurrence of any such event or the presence of any such restriction would
not have, singly or in the aggregate, a Material Adverse Effect.
(m) There are no costs or liabilities known to the Company associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related constraints
on operating activities and any potential liabilities to third parties) which
would have, singly or in the aggregate, a Material Adverse Effect on the
business, prospects, financial condition or results of operations of the Company
and the Subsidiary taken as a whole.
(n) This Agreement has been duly authorized, executed and delivered by the
Company.
(o) Except as otherwise set forth in the Prospectus or such as are not
material to the business, prospects, financial condition or results of operation
of the Company and its subsidiaries, taken as a whole, each of the Company and
the Subsidiary has good and marketable title, free and clear of all liens,
claims, encumbrances and restrictions except liens for taxes not yet due and
payable and as described in the Registration Statement, to all property and
assets described in the Registration Statement as being owned by it. All leases
to which the Company or the Subsidiary is a party are valid and binding and no
default has occurred or is continuing thereunder, which might result in any
material adverse change in the business, prospects, financial condition or
results of operation of the Company and the Subsidiary taken as a whole, and the
Company and the Subsidiary enjoy peaceful and undisturbed possession under all
such leases to which any of them is a party as lessee with such exceptions as do
not materially interfere with the use made thereof by the Company or the
Subsidiary.
<PAGE>
(p) Each of the Company and the Subsidiary maintains reasonably adequate
insurance or has established reasonably adequate reserves to cover usual
business and other risks.
(q) Ernst & Young LLP are independent public accountants with respect to
the Company and its subsidiaries as required by the Act.
(r) The financial statements, together with related schedules and notes
forming part of the Registration Statement and the Prospectus (and any amendment
or supplement thereto), present fairly the consolidated financial position,
results of operations and changes in financial position of the Company and its
subsidiaries on the basis stated in the Registration Statement at the respective
dates or for the respective periods to which they apply; such statements and
related schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved, except as disclosed therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) is, in all material respects,
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company.
(s) The Company is not and, after giving effect to the offering and sale of
the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(t) Except for the Registration Rights Agreement dated March 19, 1992
between the Company and certain banks and other institutions listed in Exhibit A
thereto (the "Existing Registration Rights Agreement"), there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include any such securities of the Company in a registration statement filed
<PAGE>
under the Act including (without limitation) with the Shares registered pursuant
to the Registration Statement.
(u) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there has not occurred any
material adverse change or any development involving a prospective material
adverse change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and the Subsidiary, taken as a
whole, (ii) there has not been any material adverse change or any development
involving a prospective material adverse change in the capital stock or in the
long-term debt of the Company or any of its subsidiaries and (iii) neither the
Company nor any of its subsidiaries has incurred any material liability or
obligation, direct or contingent.
(v) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(w) In the case of any term sheet and prospectus subject to completion
provided by the Company to the Underwriters for use in connection with the
offering and sale of the Shares pursuant to Rule 434 under the Act, such term
sheet and prospectus together are not materially different from the prospectus
included in the Registration Statement at the time of effectiveness or an
effective post-effective amendment thereto and such term sheet sets forth all
information material to investors with respect to the offering that is not
disclosed in the prospectus subject to completion or the confirmation.
(x) Each of the Company and the Subsidiary maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and any appropriate action is taken
with respect to any differences.
<PAGE>
(y) All material tax returns required to be filed by the Company and the
Subsidiary in any jurisdiction have been filed, other than those filings being
contested in good faith, and all material taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due pursuant to such
returns or pursuant to any assessment received by the Company or the Subsidiary
have been paid, other than those being contested in good faith and for which
adequate reserves have been provided.
(z) The Company has filed a registration statement pursuant to Section
12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
to register the Class A Common Stock, has filed an application to list the Class
A Common Stock on the New York Stock Exchange, and has received notification
that the listing has been approved, subject to notice of issuance.
7. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder severally represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the registered and beneficial owner of the
Shares to be sold by such Selling Stockholder pursuant to this Agreement (except
that if such Selling Stockholder is a trust, the beneficiaries of such trust in
such capacity are the beneficial owners of such Shares) and such Selling
Stockholder has, and on the Closing Date will have, good and clear title to such
Shares, free of all restrictions on transfer, liens, encumbrances, security
interests and claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to this Agreement
and assuming the Underwriters are acquiring such Shares in good faith without
notice of any adverse claim, within the meaning of the Uniform Commercial Code
as in effect in the State of Georgia ("UCC"), good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests and claims whatsoever.
(c) Such Selling Stockholder has, and on the Closing Date will have, full
legal right, power and authority to enter into this Agreement and the Custody
<PAGE>
Agreement between such Selling Stockholder and SunTrust Bank of Atlanta,
Georgia, as Custodian (a "Custody Agreement") and to sell, assign, transfer and
deliver such Shares in the manner provided herein and therein, and this
Agreement and such Custody Agreement have been duly authorized, executed and
delivered by such Selling Stockholder and each of this Agreement and such
Custody Agreement is a valid and binding agreement of such Selling Stockholder
enforceable in accordance with its terms, except (i) as may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and (ii) that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(d) The power of attorney signed by such Selling Stockholder appointing
Gerald V. Gurbacki and Theodore R. Kallgren, or either one of them, as his
attorney-in-fact to the extent set forth therein with regard to the transactions
contemplated hereby and by the Registration Statement and the Custody Agreement
has been duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding instrument of such Selling Stockholder
enforceable in accordance with its terms (except (i) as may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally, (ii) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought, and
(iii) that the enforceability of any rights to indemnity or contribution may be
limited by federal or state securities laws or by public policy).
(e) Such Selling Stockholder has not taken, and will not take, directly or
indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares pursuant to the
<PAGE>
distribution contemplated by this Agreement, and other than as permitted by the
Act, the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Shares.
(f) The execution, delivery and performance of this Agreement by such
Selling Stockholder, compliance by such Selling Stockholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of, or
qualification with, any court, regulatory body, administrative agency or other
governmental body (except as may be required under the Act, state securities
laws or Blue Sky laws) and will not conflict with or constitute a breach of any
of the terms or provisions of, or a default under, organizational documents of
such Selling Stockholder, if not an individual, or any indenture, loan or credit
agreement, mortgage, lease or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder or property
of such Selling Stockholder is bound, or violate or conflict with any laws,
rules, regulations, judgments, orders or decrees of any court, governmental
agency or body having jurisdiction over such Selling Stockholder or property of
such Selling Stockholder.
(g) Such parts of the Registration Statement under the caption "Principal
and Selling Shareholders" which specifically relate to such Selling Stockholder
do not, and will not on the Closing Date (and any Option Closing Date), contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of circumstances under which they were made, not misleading.
(h) At any time during the period described in paragraph 5(d) hereof, if
there is any change in the information referred to in paragraph 7(g) above, such
Selling Stockholder will immediately notify you of such change.
8. Indemnification. (a) The Company agrees to indemnify and hold
---------------
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter, from and against any and all losses, claims,
damages, liabilities and judgments caused by any untrue statement or alleged
<PAGE>
untrue statement of a material fact contained in the Registration Statement or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus, or caused
by 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 such losses, claims, damages, liabilities or judgments are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter furnished in writing
to the Company by or on behalf of such Underwriter through you expressly for use
therein; provided, however, that the foregoing indemnity agreement with respect
-----------------
to any preliminary prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, claims, damages and liabilities
and judgments purchased Shares, or any director or officer of or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended and supplemented) would have cured the defect giving rise to such
loss, claim, damage, liability or judgment.
(b) Each of the Selling Stockholders, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter, its directors, its officers and
each person, if any, who controls any Underwriter, from and against any and all
losses, claims, damages, liabilities and judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or caused by 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, but only with respect to claims, actions and
proceedings based on information relating to, or supplied by such Selling
<PAGE>
Stockholder. Notwithstanding the foregoing, the aggregate liability of any
Selling Stockholder pursuant to the provisions of this paragraph (b) shall be
limited to an amount equal to the aggregate purchase price received by such
Selling Stockholder from the sale of such Selling Stockholder's Shares
hereunder; provided, however, that the foregoing indemnity agreement with
-----------------
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages and
liabilities and judgments purchased Shares, or any director or officer of or any
person controlling such Underwriter, if a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended and supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or judgment.
(c) In case any proceeding (including governmental investigation) shall be
brought against any Underwriter or any director or officer of or any person
controlling such Underwriter, based upon any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
and with respect to which indemnity may be sought against the Company or any of
the Selling Stockholders, such Underwriter shall promptly notify the Company or
such Selling Stockholders, as applicable, in writing and the Company or such
Selling Stockholders, if applicable, shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all fees and expenses. Any Underwriter or any
director or officer of or person controlling such Underwriter shall have the
right to employ separate counsel in any such proceeding and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter, director, officer or controlling person unless (i)
the employment of such counsel has been specifically authorized in writing by
the Company or such Selling Stockholders, if applicable, (ii) the Company or
such Selling Stockholders, if applicable, shall have failed to assume the
defense and employ counsel or (iii) the named parties to any such proceeding
<PAGE>
(including any impleaded parties) include both such Underwriter, director,
officer or controlling person and the Company or such Selling Stockholders, as
the case may be, and such Underwriter, director, officer or controlling person
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Company or the Selling Stockholders, as the case may be, (in
which case the Company or the Selling Stockholders, as applicable, shall not
have the right to assume the defense of such proceeding on behalf of such
Underwriter, director, officer or controlling person). In any such case
described in the immediately preceding sentence, the Company and, if applicable,
such Selling Stockholders shall not, in connection with any one such proceeding
or separate but substantially similar or related proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all such Underwriters, directors, officers
and controlling persons. In any case where any Underwriter, or any director or
officer of, or person controlling such Underwriter has the right to employ
separate counsel at the Company's or any Selling Stockholder's expense, such
counsel shall be designated in writing by Donaldson, Lufkin & Jenrette
Securities Corporation and all fees and expenses of such counsel shall be
reimbursed as they are incurred. The Company or, if applicable, any such
Selling Stockholder shall not be liable for any settlement of any such action
effected without the written consent of the Company or such Selling Stockholder,
as the case may be, but if settled with the written consent of the Company or
such Selling Stockholder, the Company or, if applicable, such Selling
Stockholder agrees to indemnify and hold harmless any Underwriter and any
director, officer and controlling person of such Underwriter from and against
any loss or liability by reason of such settlement. Notwithstanding the
immediately preceding sentence, if in any case where the fees and expenses of
counsel are at the expense of the indemnifying party and an indemnified party
shall have requested the indemnifying party to reimburse the indemnified party
for such fees and expenses of counsel as incurred, such indemnifying party
agrees that it shall also be liable for any settlement of any action effected
without its written consent if (i) such settlement is entered into more than ten
<PAGE>
business days after the receipt by such indemnifying party of the aforesaid
request for reimbursement and (ii) such indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request for
reimbursement prior to the date of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and any person controlling the Company and each Selling Stockholder,
its directors, its officers and any person controlling the Selling Stockholder
to the same extent as the foregoing indemnity from the Sellers to each
Underwriter but only with reference to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter through you expressly
for use in the Registration Statement, the Prospectus or any preliminary
prospectus. In case any proceeding shall be brought against (i) the Company, any
such director, officer or any person controlling the Company or (ii) any Selling
Stockholder, any such director, officer or any person controlling such Selling
Stockholder based on the Registration Statement, the Prospectus or any
preliminary prospectus and in respect of which indemnity may be sought against
any Underwriter, the Underwriter shall have the rights and duties given to the
Sellers (except that if any Seller shall have assumed the defense thereof, such
Underwriter shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof but the fees and expenses of such
counsel shall be at the expense of such Underwriter), and the Company, any such
directors and officers and any person controlling the Company and each Selling
Stockholder, its directors, its officers and any person controlling the Selling
Stockholder shall have the rights and duties given to such Underwriter by
Section 8(c) hereof (except that if the Company, any Selling Stockholder, any
<PAGE>
such directors or officers or any such controlling person shall have the right
to employ separate counsel at such Underwriter's expense pursuant to Section
8(c), such counsel shall be designated by the Company or, if none of the
Company, its directors, officers or persons controlling the Company are parties
to such proceeding, such Selling Stockholder, as applicable).
(e) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments 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, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares 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 Sellers and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
benefits received by the Sellers and the Underwriters shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Sellers, and the total underwriting
discounts and commissions received by the Underwriters, bear to the total price
to the public of the Shares, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Sellers and the Underwriters
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the Company, the Selling Stockholders or
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(f) The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to Section 8(e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
<PAGE>
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
Section 8(e) are several in proportion to the respective number of Shares
purchased by each of the Underwriters hereunder and not joint.
(g) The remedies provided for in this Section 8 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(h) In this Agreement, references to a person "controlling" another person
or a "controlling person" shall be deemed to be a reference to a person who
controls that other person within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act.
9. Conditions of Underwriters' Obligations. The several obligations of the
---------------------------------------
Underwriters to purchase the Firm Shares under this Agreement are subject to the
satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in this
Agreement shall be true and correct on the Closing Date with the same force and
<PAGE>
effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not later than
5:00 P.M.(and in the case of a Registration Statement filed under Rule 462(b) of
the Act, not later than 10:00 p.m.), New York City time, on the date of this
Agreement or at such later date and time as you may approve in writing, and at
the Closing Date no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been commenced or shall be pending before or contemplated by the Commission.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have occurred any
change or any development involving a prospective change in the condition,
financial or otherwise, or the earnings, business, management or operations of
the Company and the Subsidiary, taken as a whole, (ii) there shall not have been
any change or any development involving a prospective change in the capital
stock or in the long-term debt of the Company or the Subsidiary and (iii)
neither the Company nor the Subsidiary shall have incurred any liability or
obligation, direct or contingent, the effect of which, in any such case
described in clause (i), (ii) or (iii), in your judgment, is material and
adverse and, in your judgment, makes it impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus.
(d) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Gerald V. Gurbacki and Theodore R. Kallgren, in their
respective capacities as the Chief Executive Officer and Chief Financial Officer
of the Company, confirming the matters set forth in paragraphs (a), (b) and
(c)(i) and (ii) of this Section 8.
(e) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
<PAGE>
have received a certificate to such effect, dated the Closing Date, from each
Selling Stockholder.
(f) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of Kilpatrick
Stockton LLP, counsel for the Company, substantially to the effect that:
(i) Each of the Company and the Subsidiary has been duly incorporated, is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority required
to carry on its business as it is currently being conducted and as described in
the Prospectus and to own, lease and operate its properties;
(ii) Each of the Company and the Subsidiary is duly qualified and is in
good standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect;
(iii) all of the outstanding shares of capital stock of the Subsidiary
have been duly and validly authorized and issued and are fully paid and non-
assessable, and to such counsel's knowledge, based solely on a review of stock
records and minute books, are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any nature;
(iv) all the outstanding shares of capital stock of the Company (including
the Shares to be sold by the Selling Stockholders) have been duly authorized and
validly issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights arising by operation of law, under the articles of
incorporation or by-laws of the Company or to the best of such counsel's
knowledge under any agreement to which the Company is a party;
(v) the Shares to be issued and sold by the Company hereunder have been
duly authorized, and when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will have been validly issued
<PAGE>
and will be fully paid and non-assessable, and the issuance of such Shares is
not subject to any preemptive or similar rights arising by operation of law,
under the articles of incorporation or by-laws of the Company or to the best of
such counsel's knowledge under any agreement to which the Company is a party;
(vi) The Registration Statement has been declared effective under the Act
as of ___ [am/pm] on ___, 1997, any required filing of the Prospectus pursuant
to Rule 424(b) has been made in the manner and within the time period required
by Rule 424(b), and such counsel has been advised by the Commission that no stop
order suspending the effectiveness of the Registration Statement has been
issued, and to the best of such counsel's knowledge and information no
proceedings for that purpose have been instituted or are pending before or
threatened by the Commission;
(vii) the statements under the captions "Description of Certain
Indebtedness", "Shares Eligible for Future Sale" and "Description of Capital
Stock" in the Prospectus and Item 14 of Part II of the Registration Statement
insofar as such statements constitute a summary of legal matters, documents or
legal proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings;
(viii) neither the Company nor the Subsidiary is in violation of its
respective charter or articles of incorporation or by-laws and, to the best of
such counsel's knowledge after due inquiry, neither the Company nor any of its
subsidiaries is in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan or credit agreement,
mortgage, lease or other agreement or instrument which, based upon a certificate
of two officers of the Company, is material to the Company and the Subsidiary
taken as a whole, or otherwise is described or referred to in the Registration
Statement or the Prospectus or filed as an exhibit to the Registration
Statement, to which the Company or the Subsidiary is a party or by which it or
the Subsidiary or their respective property is bound (collectively, "Material
Contracts");
<PAGE>
(ix) the execution, delivery and performance of this Agreement by the
Company, compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of or qualification with, any
federal, Georgia or Delaware court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various states)
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter, articles of incorporation, or
by-laws of the Company or the Subsidiary, or any Material Contract or violate or
conflict with any laws, rules or regulations that such counsel knows to be
applicable to the transactions contemplated by the Agreement, or any judgments,
orders or decrees known to such counsel of any court, or any governmental agency
or body having jurisdiction over the Company or the Subsidiary or their
respective property;
(x) after due inquiry, which does not include any formal docket searches
other than of federal and state courts in Georgia and Delaware, such counsel
does not know of any legal or governmental proceeding pending or threatened to
which the Company or the Subsidiary is a party or to which any of their
respective property is subject that is required to be described in the
Registration Statement or the Prospectus and is not so described, or of any
statute, regulation, contract or other document which is required to be
described in the Registration Statement or the Prospectus or is required to be
filed as an exhibit to the Registration Statement that is not described or filed
as required;
(xi) the Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xii) to the best of such counsel's knowledge after due inquiry, except
for the Existing Registration Rights Agreement, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
<PAGE>
the Act with respect to any securities of the Company or to require the Company
to include any such securities of the Company in a registration statement filed
under the Act including (without limitation) with the Shares registered pursuant
to the Registration Statement.
(xiii) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and other
financial and statistical data and Schedule II included therein as to which no
opinion need be expressed) comply as to form in all material respects with the
Act, (B) such counsel has no reason to believe that (except for the financial
statements and other financial and statistical data and Schedule II as to which
such counsel need not express any belief) at the time the Registration Statement
became effective and on the date of this Agreement, the Registration Statement
and the prospectus included therein contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) such counsel
has no reason to believe that the Prospectus, as amended or supplemented, if
applicable (except for the financial statements and Schedule II and other
financial and statistical data, as aforesaid) contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and
(xiv) this Agreement has been duly authorized, executed and delivered by
the Company.
In giving such opinion with respect to the matters covered by clause (xiii)
such counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
The opinion of Kilpatrick Stockton LLP described in paragraph (f) above
shall be rendered to you at the request of the Company and shall so state
therein.
<PAGE>
(g) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of King and
Spalding, counsel for The Bank of Nova Scotia (the "Bank"), satisfactory to the
Underwriters, substantially to the effect that:
(i) The Bank has good and clear title to the Shares to be sold by the Bank
and upon delivery thereof pursuant to this Agreement and payment therefor, good
and clear title to such Shares will pass to the Underwriters, severally, free of
all restrictions on transfer, liens, encumbrances, security interests and claims
whatsoever, assuming that the Underwriters are purchasing such Shares in good
faith without notice of any "adverse claim" as such term is defined in the UCC;
(ii) The execution, delivery and performance of this Agreement by the Bank,
compliance by the Bank with all of the provisions thereof and the consummation
of the transactions contemplated thereby by the Bank will not require any
consent, approval, authorization or other order of or qualification with, any
federal or Georgia court or governmental body or agency (except such as may be
required under the securities or blue sky laws of the various United States);
(iii) The Custody Agreement is a valid and binding agreement of the Bank,
enforceable in accordance with its terms (except (i) as may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and (ii) that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought);
(iv) The Power of Attorney executed by the Bank appointing Gerald V.
Gurbacki and Theodore R. Kallgren, or either of them, as attorney-in-fact is a
valid and binding instrument of the Bank, enforceable in accordance with its
terms (except (i) as may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally, (ii) that the remedy of
<PAGE>
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought, and (iii) that the enforceability of any
rights to indemnity or contribution may be limited by federal or state
securities laws or by public policy).
The opinion of King & Spalding described in paragraph (g) above shall be
rendered to you at the request of the Bank and shall so state therein.
(h) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of Borden &
Elliot, Canadian counsel for the Bank, satisfactory to the Underwriters,
substantially to the effect that:
(i) The Bank is a bank to which the Bank Act (Canada) applies and the Bank
validly exists under such Act;
(ii) Each of this Agreement, the Custody Agreement, the Power of Attorney
executed by the Bank appointing Gerald V. Gurbacki and Theodore R. Kallgren or
either of them as attorneys-in-fact and the other agreements ("Listed
Agreements") referred to in such counsel's opinion, has been duly authorized,
executed and delivered by the Bank;
(iii) The Bank has the corporate capacity, power and authority, and any
approval required by the laws of the Province of Ontario and the federal laws of
Canada applicable in Ontario, to sell, assign, transfer and deliver the Shares
to be sold by it in the manner provided in this Agreement and the Custody
Agreement;
(iv) The execution, delivery and performance by the Bank of this
Agreement, the compliance by the Bank with the provisions hereof applicable to
the Bank and the consummation by the Bank of the transactions contemplated
thereby, (a) do not require any consent, approval, authorization or other order
of or qualification with, any court or governmental body or agency of Canada or
of the Province of Ontario; and (b) do not conflict with or constitute a breach
of any of the provisions of or constitute a default under: (i) the charter or
by-laws of the Bank; (ii) any statute or regulation by which the Bank or any of
<PAGE>
its assets is bound or to which the Bank or any of its assets is subject; or
(iii) the Listed Agreements or, to the best of our knowledge, any order,
judgment or decree by which the Bank is bound or to which any of its assets is
subject.
The opinion of such counsel described in paragraph (h) above shall be
rendered to you at the request of the Bank and shall so state therein;
(i) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of Paul Hastings
Janofsky & Walker LLP, special counsel for Brian R. Esher ("Esher"),
satisfactory to the Underwriters, substantially to the effect that:
(i) the execution, delivery and performance of this Agreement by Esher,
compliance by Esher with all the provisions hereof and the consummation of the
transactions contemplated hereby by Esher will not require any consent,
approval, authorization or other order of or qualification with, any federal,
Georgia or Delaware court (based solely on formal docket searches of federal and
state courts in Georgia and Delaware on June __, 1997 and a certificate of
Esher) or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a default under any
indenture, loan or credit agreement, mortgage, lease or other agreement or other
instrument to which (based on a certificate of Esher) Esher is a party or by
which (based on such certificate of Esher) Esher or his properties are bound, or
violate or conflict with any laws, rules or regulations that such counsel knows
to be applicable to the transactions contemplated by the Agreement, or any
judgments, orders or decrees known to such counsel of any court, or any
governmental agency or body having jurisdiction over Esher or his property;
(ii) this Agreement has been duly executed and delivered by Esher;
(iii) the Custody Agreement to which Esher is a party has been duly
executed and delivered by Esher, and is a valid and binding agreement of Esher
enforceable in accordance with its terms (except (i) as may be limited by
<PAGE>
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and (ii) that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought);
(iv) Esher has full legal right, power and authority to sell, assign,
transfer and deliver the Shares to be sold by him in the manner provided in this
Agreement and such Custody Agreement;
(v) upon transfer of the Shares by Esher to the Underwriters and payment
therefor in accordance with this Agreement and assuming the Underwriters are
acquiring such Shares in good faith without notice of any adverse claim, within
the meaning of the UCC, the Underwriters will acquire such Shares free of all
adverse claims (within the meaning of the UCC). "Transfer" of the Shares to the
Underwriters will occur upon the making by DTC of appropriate entries
transferring the Shares on its books and records to the account of the
Underwriters; and
(vi) the power of attorney signed by Esher appointing Gerald V. Gurbacki
and Theodore R. Kallgren, or either of them, as Esher's attorney-in-fact to the
extent set forth therein with regard to the transactions contemplated hereby and
by the Registration Statement has been duly executed and delivered by Esher and
is a valid and binding instrument of Esher enforceable in accordance with its
terms (except (i) as may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally, (ii) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought, and (iii) that the enforceability of any
rights to indemnity or contribution may be limited by federal or state
securities laws or by public policy).
In rendering the opinion set forth in paragraph (i)(i) above, such counsel
may rely on the certificate of Esher referred to therein (in a form and
<PAGE>
substance satisfactory to the Underwriters), provided that a copy of such
certificate is delivered to you at Closing. The opinion of counsel for Esher
described in paragraph (i) above shall be rendered to you at the request of
Esher and shall so state therein.
(j) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of Paul Hastings
Janofsky & Walker LLP, special counsel for the Brian R. Esher Children's Trust
(the "Esher Trust"), satisfactory to the Underwriters, substantially to the
effect that:
(i) the execution, delivery and performance of this Agreement by the Esher
Trust, compliance by the Esher Trust with all the provisions hereof and the
consummation of the transactions contemplated hereby by the Esher Trust will not
require any consent, approval, authorization or other order of or qualification
with, any federal, Georgia, Delaware or New York court (based solely on formal
docket searches of federal and state courts in Georgia, Delaware and New York on
June __, 1997 and a certificate of the Esher Trust) or governmental body or
agency (except such as may be required under the securities or Blue Sky laws of
the various states) and will not conflict with or constitute a breach of any of
the terms or provisions of, or a default under any indenture, loan or credit
agreement, mortgage, lease or other agreement or other instrument to which
(based on a certificate of the Esher Trust) the Esher Trust is a party or by
which (based on such certificate of the Esher Trust) the Esher Trust or its
properties are bound, or violate or conflict with any laws, rules or regulations
that such counsel knows to be applicable to the transactions contemplated by the
Agreement, or any judgments, orders or decrees known to such counsel of any
court, or any governmental agency or body having jurisdiction over the Esher
Trust or its property;
(ii) this Agreement has been duly authorized, executed and delivered by
the Esher Trust;
(iii) the Custody Agreement to which the Esher Trust is a party has been
duly authorized, executed and delivered by the Esher Trust, and is a valid and
binding agreement of the Esher Trust enforceable in accordance with its terms
<PAGE>
(except (i) as may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights generally and (ii) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought);
(iv) the Esher Trust has full legal right, power and authority to sell,
assign, transfer and deliver the Shares to be sold by it in the manner provided
in this Agreement and such Custody Agreement;
(v) upon transfer of the Shares by the Esher Trust to the Underwriters and
payment therefor in accordance with this Agreement and assuming the Underwriters
are acquiring such Shares in good faith without notice of any adverse claim,
within the meaning of the UCC, the Underwriters will acquire such Shares free of
all adverse claims (within the meaning of the UCC). "Transfer" of the Shares to
the Underwriters will occur upon the making by DTC of appropriate entries
transferring the Shares on its books and records to the account of the
Underwriters; and
(vi) the power of attorney signed by the Esher Trust appointing Gerald V.
Gurbacki and Theodore R. Kallgren, or either of them, as its attorney-in-fact to
the extent set forth therein with regard to the transactions contemplated hereby
and by the Registration Statement has been duly authorized, executed and
delivered by or on behalf of the Esher Trust and is a valid and binding
instrument of the Esher Trust enforceable in accordance with its terms (except
(i) as may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights generally, (ii) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought, and (iii) that the enforceability of any
rights to indemnity or contribution may be limited by federal or state
securities laws or by public policy).
<PAGE>
In rendering the opinion set forth in paragraph (j)(i) above, such counsel
may rely on the certificate of the Esher Trust referred to therein (in a form
and substance satisfactory to the Underwriters), provided that a copy of such
certificate is delivered to you at Closing. The opinion of counsel for the Esher
Trust described in paragraph (j) above shall be rendered to you at the request
of the Esher Trust and shall so state therein.
(k) The Representatives shall have received an opinion, dated the Closing
Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters,
in form and substance reasonably satisfactory to the Representatives.
(l) You shall have received on each of the date hereof and the Closing Date
a letter on and as of the date hereof or Closing Date as the case may be, in
form and substance satisfactory to you, from Ernst & Young LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(m) The merger of Pameco Holdings, Inc. and the Delaware corporation
previously known as Pameco Corporation into the Company, and the associated
recapitalization of the Company as described in the Prospectus, shall have been
consummated on terms and conditions reasonably satisfactory to the
Representatives.
(n) The Company and the Selling Stockholders shall not have failed at or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company at or
prior to the Closing Date.
(o) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(p) The Shares shall have been duly listed, subject to notice of issuance,
on the New York Stock Exchange.
<PAGE>
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
10. Effective Date of Agreement and Termination. This Agreement shall
-------------------------------------------
become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time prior to the Closing Date by
you by written notice to the Sellers if any of the following has occurred: (i)
since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective material adverse change in the condition,
financial or otherwise, of the Company and the Subsidiary, taken as a whole, or
the earnings, affairs, or business prospects of the Company and the Subsidiary,
taken as a whole, whether or not arising in the ordinary course of business,
which would, in your judgment, make it impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus, (ii) any outbreak or
escalation of hostilities or other national or international calamity or crisis
or change in economic conditions or in the financial markets of the United
States or elsewhere that, in your judgment, is material and adverse and would,
in your judgment, make it impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus, (iii) the suspension or material
limitation of trading in securities on the New York Stock Exchange, the American
Stock Exchange or the NASDAQ National Market System, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your opinion materially and adversely affects, or will materially and adversely
affect, the business or operations of the Company or the Subsidiary, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
<PAGE>
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it or they have agreed to
purchase hereunder on such date and the aggregate number of Firm Shares or
Additional Shares, as the case may be, which such defaulting Underwriter or
Underwriters, as the case may be, agreed but failed or refused to purchase is
not more than one-tenth of the total number of Shares to be purchased on such
date by all Underwriters, each non-defaulting Underwriter shall be obligated
severally, in the proportion which the number of Firm Shares set forth
opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be,
have agreed to purchase, or in such other proportion as you may specify, to
purchase the Firm Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters, as the case may be, agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
--------
Firm Shares or Additional Shares, as the case may be, which any Underwriter has
agreed to purchase pursuant to Section 2 hereof be increased pursuant to this
Section 10 by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares, with
respect to which such default occurs is more than one-tenth of the aggregate
number of Shares to be purchased on such date by all Underwriters and
arrangements satisfactory to you and the applicable Sellers for purchase of such
Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter and
the applicable Sellers. In any such case which does not result in termination of
this Agreement, either you or the Sellers shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
<PAGE>
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
11. Agreements of the Selling Stockholders. Each Selling Stockholder
--------------------------------------
severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes with respect to the
Shares to be sold by such Selling Stockholder;
(b) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of such Selling Stockholder's obligations
under this Agreement including the fees, disbursements and expenses of the
Selling Stockholder's counsel but not including registration and printing
expenses; and
(c) To do and perform all things to be done and performed by the Selling
Stockholder under this Agreement prior to the Closing Date and to the extent
within its reasonable control satisfy all conditions precedent to the delivery
of the Shares pursuant to this Agreement.
12. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if to the Company, to Pameco
Corporation, 1000 Center Place, Norcross, Georgia 30093, Attention: Chief
Executive Officer, (b) if to the Selling Stockholders, to Messrs. Gerald V.
Gurbacki and Theodore R. Kallgren c/o Pameco Corporation, 1000 Center Place,
Norcross, Georgia 30093 and (c) if to any Underwriter or to you, to you c/o
<PAGE>
Donaldson, Lufkin & Jenrette Securities Corporation, 140 Broadway, New York, New
York 10005, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Selling Stockholders, the Company, its
officers and directors and of the several Underwriters set forth in or made
pursuant to this Agreement shall remain operative and in full force and effect,
and will survive delivery of and payment for the Shares, regardless of (i) any
investigation, or statement as to the results thereof, made by or on behalf of
any Underwriter, any officer or director or person controlling any Underwriter
or by or on behalf of the Sellers, the officers or directors of the Company or
any controlling person of the Sellers, (ii) acceptance of the Shares and payment
for them hereunder and (iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Sellers, the Underwriters and
their respective directors, officers and controlling persons referred to herein
and their respective successors and assigns, all as and to the extent provided
in this Agreement, and no other person shall acquire or have any right under or
by virtue of this Agreement. The term "successors and assigns" shall not
include a purchaser of any of the Shares from any of the several Underwriters
merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
PAMECO CORPORATION
By_________________________
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE II HERETO
By_________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.
SCHRODER WERTHEIM & CO. INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By__________________________
<PAGE>
SCHEDULE I
----------
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
The Robinson-Humphrey Company, Inc.
Schroder Wertheim & Co. Incorporated
_____________________
Total 3,578,644
<PAGE>
SCHEDULE II
-----------
Selling Stockholders
--------------------
Number of Firm
Name Shares Being Sold
- ---- -----------------
Brian R. Esher 353,728
Brian R. Esher Children's Trust 149,375
The Bank of Nova Scotia 75,541
________________
Total 578,644
<PAGE>
ANNEX I
-------
Required Lock-ups
-----------------
James R. Balkcom, Jr.
Linda P. Balkcom
Julie Balkcom Green
Mary Kathryn Balkcom
Michael H. & Rosemary E. Bulkin
G. Thomas Braswell, Jr.
Earle Dolive
Gerald V. Gurbacki
Theodore R. Kallgren
Charles A. Sorrentino
Donagh M. Kelly
Jeffrey S. Ruege
Mark L. Davison
Walter W. Wilcox
J. Christopher van Ee
Mark A. Graham
Paul K. Bois
Thomas L. Jacques
TCR International Partners LP
Terbem Limited
Tinvest Limited
Mitvest Limited
Bobst Investment Corp
K Investment Partners LP
Klingenstein Charitable Partners
TG Partners
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated April 2, 1997 (except for Note 10 as to which the
date is June , 1997), in the Registration Statement (Form S-1 No. 333-24043)
and related Prospectus of Pameco Corporation for the registration of 3,578,644
shares of its Class A Common Stock.
Ernst & Young LLP
Atlanta, Georgia
June , 1997
- ---------------------
The foregoing consent is in the form that will be signed upon the restatement
of capital accounts pursuant to filing of the merger agreement described in
Note 10 to the consolidated financial statements.
Ernst & Young LLP
Atlanta, Georgia
May 30, 1997
