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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended February 28, 1999
OR
[_]
Transition Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange
Act of 1934
For the transition period from to
Commission file number 001-12837
Pameco Corporation
(Exact name of registrant as specified in its charter)
Georgia 51-0287654
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
1000 Center Place
Norcross, GA 30093
(Address of principal executive offices)
(770)-798-0700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of exchange on
Title of each class which registered
------------------- -------------------
<S> <C>
Class A Common Stock................................. New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part II of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Class A Common Stock held by non-
affiliates of the registrant was $15,779,059, on May 14, 1999.
The number of shares outstanding of the registrant's Class A Common Stock,
$.01 par value, and Class B Common Stock, $.01 par value, was 5,395,678 and
3,792,926 respectively, as of May 14, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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PAMECO CORPORATION
INDEX
<TABLE>
<C> <S> <C>
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 4
Item 3. Legal Proceedings.............................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............ 5
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters....................................................... 6
Item 6. Selected Financial Data........................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 15
Item 8. Consolidated Financial Statements and Supplementary Data....... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant............. 36
Item 11. Executive Compensation......................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 36
Item 13. Certain Relationships and Related Transactions................. 36
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K...................................................... 36
Signatures............................................................... 38
</TABLE>
<PAGE>
PART I
Item 1. Business
Overview
Pameco Corporation ("Pameco" or the "Company") 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. As of February 28, 1999, the
Company operated 361 branches in 47 states and Guam which are located in 95 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 1999, the Company's HVAC
business generated approximately 57.7% of its revenues, while the
refrigeration business generated the balance. In fiscal 1999, Pameco primarily
focused on generating net sales 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. 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 needs at both the local and national level. The Company's
branch, outside sales, and field associates offer customers technical advice
and service in diagnosing problems and recommending solutions, which are an
essential element of the Company's customer orientation. 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 361 branches and 6 regional
distribution centers.
The Industry
Based upon projections in the most recent industry report available,
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) will total
approximately $12.7 billion and $3.5 billion, respectively, in 1999. The
combined $16.2 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.
Management believes that the market for the Company's products is fragmented
for several reasons. First, key manufacturers have historically limited their
distribution rights, including those granted to Pameco, to selected geographic
areas. Second, customers prefer doing business at branch locations within a
30-minute commute (five to 15 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 stockkeeping units ("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.
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.
The financial constraints limit their ability to offer broad product lines and
multiple brands. They are also unable to afford sophisticated inventory
management and control systems necessary to operate multiple branches
effectively or to invest significant resources in the information technology
necessary to improve inventory flow.
1
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During the last three fiscal years, the Company has made approximately
fifteen acquisitions, in line with its strategy to occupy a leading position
in the consolidating distribution segment of the climate control industry,
building a centralized national distribution network. Through these
acquisitions, the Company has established a national presence, spanning 95 of
the top 100 population centers in the United States. With these acquisitions
complete, the Company is now focused on integrating the business processes and
information systems of the acquired companies and on growing its market share
in these 95 large markets. Once this integration is complete and the methods
are installed to facilitate targeted growth, the Company will evaluate the
market opportunities for acquisitions and once again refocus its business
strategy.
The Company intends to realize the advantages provided from its scale by
achieving the following objectives in the year ending February 29, 2000
("Fiscal 2000"):
1. Redefine and enhance the key business processes across the Company's
locations to enable the efficient and effective delivery of its product and
services and the communication of information so as to provide enhanced
customer service at the lowest total delivered cost--This redefinition and
enhancement will focus on the manner in which the Company conducts business
with its customers and suppliers. The Company will enhance the point of
customer focus in its branches after carefully evaluating the potential in
each of the markets served. Several branches will be resized, based on the
local market demands and potential. The method of resupply to these
branches will be redesigned through shifts in the current distribution
center network and redefinition of key supplier responsibilities for
inventory management and flow. With the enhanced emphasis on customer focus
at the branches, certain functions performed in the Company's Norcross
location will be shifted closer to its customers so as to provide more
timely and effective customer service.
2. Successfully complete the initial installation of an enterprise system
technology solution to enable more timely and accurate data communications
so as to provide enhanced customer service at the lowest total delivered
cost--The installation of the enterprise system technology solution will
enable the enhancement of the customer focus in the Company's branches. The
initial software installation was troubled, but is now progressing quickly.
The Company expects the installation of enhanced functionality and the
training of personnel will be completed during fiscal 2000. The
applications of this enabling technology are already being extended. All
branches will have Internet connectivity by fall of 1999. E-commerce
applications for customers and for suppliers are currently being evaluated.
The Company anticipates that a number of its key business processes, which
have high customer impact, will lend themselves to enhancement once the new
technology platform is in place.
3. Enhance the capabilities of its associates to those skill sets required in
an integrated supply company which uses its scale to interface with its
suppliers and to serve customers more efficiently and effectively--The
skill sets of the Company's associates will be extended through a number of
training programs currently under development. These programs, some of
which are being contracted from outside the Company, focus on customer
service skills, technical skills, interpersonal skills and business
management skills. An example of the type of programs being developed are
the technical training programs necessary for North American Training
Excellence ("NATE") certification. A number of these programs will be
delivered at local sites over the Internet using the Company's new
technology platform. The first of these programs are expected to be
available in the fall of 1999.
2
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The Company intends to realize its goal of growing market share in its present
markets by achieving the following objectives in fiscal 2000:
1. Expand the products and services available to its current customers.--
Having the right product at the right time and at the right price available
to the customer is key to the Company's business. The Company's scale
provides it with a unique opportunity in the market to have a greater array
of products and services available to the customer. With the enhancing of
the customer focus in the local markets, the Company will undertake
customer outreach programs to better understand how it can bring greater
value to the relationships it has with its customers. The redefinition of
the business processes and the installation of the new information
technology platform will provide the Company with the ability to make each
branch more unique and more tailored to the needs of each local market.
2. Expand the customer base served by its branches by better understanding the
needs of potential customers and retrofitting the branches to respond to
needs of the local markets.--The growth opportunity in these 95 markets is
large. By enhancing the customer focus in the local markets the Company's
branches will be able to leverage the scale of the Company to bring
products and services into a "one-stop" environment. The marketing outreach
programs will focus first on the needs of existing customers, then on the
needs of potential customers within the local markets. Local market
penetration programs will be developed based on customer attractiveness
criteria currently under development. The first of these programs is
expected to be available in fall of 1999.
Suppliers
The Company's size and stature in the HVAC and refrigeration industries, as
well as its strong and longstanding supplier relationships, enable the Company
to obtain favorable terms from its supplers. Additionally, while supplers have
traditionally resisted granting distribution rights on a national level, due
to the Company's size and growth through acquisitions, Pameco has 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 acquisitions.
However, a significant portion of the Company's distribution arrangements with
its suppliers are verbal. Further, many of these distribution rights may be
terminated by the supplier immediately or upon short notice.
During fiscal 1999, the Company purchased approximately $491.9 million of
products for resale, of which approximately 43.1% was obtained from its top
five suppliers, while the 25 largest suppliers accounted for approximately
70.9% of total purchases. No single supplier accounted for more than 13.3% of
the Company's total purchases.
Customers
The Company currently serves over 55,000 customers, with no single customer
accounting for more than 2.5% of the Company's total sales and with the top
ten customers representing less than 7.5% of total sales in fiscal 1999.
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 competitive factors within the
Company's industries include breadth and quality of product lines distributed,
3
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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.
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 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.
Associates
As of February 28, 1999, Pameco employed 1,691 associates, 276 of whom were
employed primarily in management and administration, 124 in regional
distribution centers and 1,291 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.
Forward-Looking Statements
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including without limitation the Company's plans for future business
development activities, product mix, margin enhancements, the timely review of
the Company's management information system ("MIS") and the successful
implementation of the MIS and any additional enterprise wide software required
to enhance the functionality thereof, eventual improvements to the Company's
logistics and delivery system through the MIS, and the Company's ability to
operate acquired companies in a profitable manner. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Investors are cautioned that any
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties and that actual results may differ materially
from those contemplated by such forward-looking statements. Such risks
include, without limitation, risks associated with the Company's information
technology, including its MIS, the risk that the Company will not be able to
successfully implement its new strategies, the risk that new acquisitions will
not be successfully integrated into the Company, the seasonality and
cyclicality of the Company's sales, the Company's competition, the Company's
dependence on supplier relationships, the increased presence of buying groups
and risks related to the Company's borrowings.
Item 2. Properties
The Company currently maintains its corporate headquarters in Norcross,
Georgia. The lease 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.
4
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Pameco leases its six distribution centers pursuant to agreements expiring
from five to 10 years. As of February 28, 1999, the Company operated 361
branches in 47 states and Guam, of which five are owned. 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.
Item 3. Legal Proceedings
From time to time, the Company is involved in claims and legal proceedings
in the ordinary course of business. The Company intends to defend vigorously
all such claims and does not believe any such matters would have a material
adverse effect on the Company's results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None
5
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Registrant was incorporated in March 1997, and since June 4, 1997 its
Class A Common Stock has been traded on the New York Stock Exchange. As of May
14, 1999, there were approximately 1,700 beneficial holders and 360 holders of
record of the Class A Common Stock. As of May 14, 1999, there were 60 holders
of record of the Class B Common Stock.
During the past three years, the following persons were issued Class A
Common Stock of the Registrant or its predecessor based on the exemption
provided under Section 4(2) of the Securities Act of 1933 on the date and for
the consideration referenced below:
<TABLE>
<CAPTION>
Name No. Shares Date of Issuance Consideration
---- ---------- ---------------- -------------
<S> <C> <C> <C>
*J Chelsey Culpepper.................. 625 07/31/97 $ 3,400.00
*Hector M. Colon...................... 375 07/09/97 1,800.00
*Robert J. Duncan..................... 375 06/23/97 1,800.00
*Mary C. Barnett...................... 375 06/20/97 1,800.00
*Eugene H. Dill....................... 375 06/19/97 330.00
*James E. Plew........................ 375 06/19/97 330.00
*Andrew F. Ross....................... 375 06/19/97 330.00
*Garland A. Smith..................... 375 06/19/97 330.00
*Randall Fly.......................... 5,000 06/17/97 4,400.00
*Charles Bailly....................... 375 06/16/97 330.00
*David Whitman........................ 375 06/16/97 330.00
*James C. Herlinger................... 375 06/12/97 330.00
*Wally W. George...................... 5,000 06/11/97 4,400.00
*Philip A. Mattera.................... 375 06/11/97 330.00
*Francis S. Dzialo.................... 375 06/10/97 330.00
*Lawrence C. Olson.................... 6,250 06/10/97 5,500.00
*Thomas S. Greenway................... 375 06/09/97 330.00
*John K. Hammer....................... 375 06/09/97 330.00
*Jacke Reynolds....................... 5,000 06/09/97 4,400.00
*John D. Davis........................ 375 06/06/97 330.00
*Pedro Morales........................ 375 06/04/97 330.00
*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. Satterthwaite............... 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
*Philip J. Filer...................... 3,987 04/04/97 19,140.00
*Donagh M. 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 T. Silva....................... 375 04/03/97 330.00
*Walter W. Wilcox..................... 6,250 04/03/97 5,500.00
*Mark A. Graham....................... 12,362 04/02/97 44,620.00
</TABLE>
6
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<TABLE>
<CAPTION>
Name No. Shares Date of Issuance Consideration
---- ---------- ---------------- -------------
<S> <C> <C> <C>
*Thomas L. Jacques................... 7,625 04/01/97 41,350.00
*Mary M. McCulley.................... 2,750 04/01/97 13,200.00
*Jeffrey D. Ward..................... 3,525 03/31/97 15,110.00
*Paul K. 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
*Steven J. Pavlichek................. 416 01/22/97 2,664.00
*Patricia M. 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
*Benjamin A.H. Dacke................. 3,125 07/09/96 2,750.00
</TABLE>
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*Pursuant to the exercise of stock options
The following table sets forth for the periods indicated the high and low
sales prices of the Class A Common Stock on the New York Stock Exchange. The
Company has not paid dividends on its Class A Common Stock. The Company
intends to retain its earnings to finance its growth and for general corporate
purposes. Under the terms of its credit agreements, the Company may not pay
dividends without the consent of its lenders. Prior to the Company's initial
public offering ("IPO") in June 1997, there was no market for the Company's
stock.
<TABLE>
<CAPTION>
Stock Market Price Range Low High
------------------------ ------ ------
<S> <C> <C>
First Quarter--March 1, 1998--May 31, 1998........................ $16.38 $20.50
Second Quarter--June 1, 1998--August 31, 1998..................... $17.00 $23.75
Third Quarter--September 1, 1998--November 30, 1998............... $13.69 $16.31
Fourth Quarter--December 1, 1998--February 28, 1999............... $ 6.69 $13.75
First Quarter--March 1, 1997--May 31, 1997........................ -- --
Second Quarter--June 1, 1997--August 31, 1997..................... $16.00 $22.56
Third Quarter--September 1, 1997--November 30, 1997............... $15.75 $19.68
Fourth Quarter--December 1, 1997--February 28, 1998............... $15.50 $19.25
</TABLE>
7
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Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------
February 28, February 28, February 28, February 29, February 28,
1999 (a) 1998 (b) 1997 (c) 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Results of Operations
Net sales............... $625,042 $ 484,010 $ 378,658 $ 334,537 $ 323,152
Net (loss) income
applicable to common
shareholders........... $ (188) $ 8,846 $ 10,732 $ 5,494 $ 4,271
Per Share Data
Basic (loss) earnings
per share.............. $ (0.02) $ 1.14 $ 1.82 $ 0.88 $ 0.68
Diluted (loss) earnings
per share.............. $ (0.02) $ 1.08 $ 1.71 $ 0.83 $ 0.65
Balance Sheet
Information
Total assets............ $273,888 $ 210,812 $ 149,369 $ 119,167 $ 124,964
Long-term liabilities... $ 99,283 $ 45,911 $ 36,299 $ 42,972 $ 45,842
Redeemable preferred
stock.................. -- -- -- $ 4,000 $ 4,000
</TABLE>
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(a) Reflects the results of operations of Keller Supply, Inc., George L.
Johnston Co., Inc., Park Heating and Air Conditioning Supply Co., Inc., Tesco
Distributors, Inc., Climate Supply Company, Inc. and Belleville Supply
Company, Inc. from the respective dates of acquisition.
(b) Reflects the results of operations of Bellows-Evans, Inc., Trigg Supply,
Inc., Heating Cooling Distributors, Inc., Saez Refrigeration, Inc., Saez
Refrigeration of Hialeah, Inc., Superior Supply Company, General Heating and
Cooling Company, and Williams Refrigeration, Inc. from the respective dates of
acquisition.
(c) Reflects the results of operations of Chase Supply Company and Sid Harvey
Industries from the respective dates of acquisition.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pameco Corporation 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. As of February 28, 1999, the Company
operated 361 branches in 47 states and Guam, which are located in 95 of the
top 100 SMSAs in the country.
In fiscal 1999, Pameco primarily focused on generating net sales 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. 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.
8
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Results of Operations
The table below sets forth certain consolidated historical operating
information for the Company, as a percentage of total sales, for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
February 28, February 28, February 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................... 100.0 % 100.0 % 100.0 %
Cost of products sold................... 76.5 76.2 75.4
----- ----- -----
Gross profit............................ 23.5 23.8 24.6
Warehousing, selling, and
administrative expenses............... 21.5 20.4 21.4
Severance.............................. 0.3 0.0 0.0
Executive cash bonus................... 0.0 0.0 0.6
Restructuring.......................... 0.6 0.0 0.0
Amortization of excess of cost over
acquired net assets................... 0.2 0.1 0.1
Amortization of excess of acquired net
assets over cost...................... (0.2) (0.3) (0.3)
----- ----- -----
Operating earnings...................... 1.1 3.6 2.8
Other expense:
Interest expense, net.................. 0.8 0.4 1.0
Discount on sales of accounts
receivable and other expenses......... 0.5 0.6 0.4
----- ----- -----
(Loss) income before income taxes....... (0.2) 2.6 1.4
(Benefit) provision for income taxes.... (0.1) 0.7 (1.5)
----- ----- -----
Net (loss) income....................... (0.1)% 1.9% 2.9%
===== ===== =====
</TABLE>
Year ended February 28, 1999 Compared to Year Ended February 28, 1998
Net sales of $625.0 million for the year ended February 28, 1999 increased
29.1% from $484.0 million for the year ended February 28, 1998. Same store
daily sales increased 9.6% for the year ended February 28, 1999 as compared to
the prior year.
Acquired branches contributed significantly to the year to year growth in
net sales. The net sales of HVAC products on a same store basis increased by
14.8% for the year ended February 28, 1999 as compared to the prior year.
Continued net sales improvement in the Company's ThermalZone(TM) private label
equipment line was the primary reason for the increase. Sales of refrigeration
equipment, parts, and supplies increased 3.1% on a daily same store basis for
the year ended February 28, 1999 as compared to the prior year.
For the year ended February 28, 1999, gross profit increased 27.4% to $146.9
million from $115.3 million in the prior year. The Company's gross profit
increased largely due to increased sales volume. The gross profit percentage
decreased to 23.5% for the year ended February 28, 1999 as compared to 23.8%
for the prior year. The Company sustained higher product shrinkage and damage
expenses in the year ended February 28, 1999 than in the previous year. The
gross profit also was adversely impacted by non-recurring charges primarily
consisting of (i) the write down of inventories associated with certain
discontinued product lines and (ii) other charges for damaged equipment in
inventory. Without the effect of these non-recurring charges, the gross profit
percentage would have been 24.1% for the year ended February 28, 1999. These
reductions to gross profit were offset in part by improved terms and prompt
payment discounts from key suppliers. The Company also revised its purchasing
practices to take further advantage of manufacturer rebate programs and volume
purchase discounts.
Warehousing, selling, and administrative expenses for the year ended
February 28, 1999 increased 36.4% to $134.7 million from $98.7 million in the
prior year. Although a portion of the increase over the prior year can be
attributed to the normal operating expenses of the acquired branches, the
Company also incurred significant additional expenses during its conversion to
a new enterprise-wide management information system ("MIS").
9
<PAGE>
To facilitate a smooth transition to the new system with minimal disruption to
its customers, the Company retained seasonal employees at its branches and
warehouses through the transition period that lasted into the third quarter of
this year. Likewise, additional administrative costs were incurred at the
corporate office during this transition period for the same purpose. The
Company also recorded non-recurring charges primarily consisting of
(i) expensing certain training and software costs relating to the
implementation of the new MIS; and (ii) an increase in the Company's allowance
for losses on accounts receivable relating to the increase in aging of such
receivables because of billing statement delays and other inefficiencies
associated with the transition to the new MIS. Warehousing, selling, and
administrative expenses as a percentage of net sales increased to 21.5% for
the year ended February 28, 1999 from 20.4% in the prior year. Without the
effect of these non-recurring charges, the warehousing, selling, and
administrative expenses as a percentage of net sales would have been 20.8% for
the year ended February 28, 1999.
For the year ended February 28, 1999, the Company recorded non-recurring
charges of $1.5 million related to future severance payments to be paid to the
Company's former president and chief executive officer, a former executive
vice president, and its former chief information officer.
For the year ended February 28, 1999, the Company recorded a $3.2 million
restructuring charge for the costs relating to the downsizing of distribution
centers and the closing or combining of branch locations. The Company also
recorded an $840,000 charge for the costs associated with terminating its
dedicated fleet contract.
Interest expense during the year ended February 28, 1999 increased to $5.1
million from $2.0 million in the previous year. The Company's average
borrowings under the Working Capital Facility (as defined below) increased by
$64.8 million over the previous year. During the past fiscal year, the Company
utilized the term loans to fund all its acquisitions. To avoid disruptions
during the transition to the new MIS, the inventory levels were increased to a
higher than normal level and maintained at that level through the transition
period. In addition, the mailing of customer statements was delayed in
September and October as the new system became operational. Both of these
events resulted in increased bank borrowings during the third and fourth
quarters of the year ended February 28, 1999. The Securitization Program (as
defined below) was recorded as a sale of assets; therefore, approximately
$43.6 million of accounts receivable and debt are not reflected on the
Company's balance sheet at February 28, 1999. The discount on the sale of
accounts receivable of $3.6 million and $3.0 million for the years ended
February 28, 1999 and February 28, 1998, respectively, was recorded as other
expenses on the consolidated statements of operations. The average rate of
interest on all debt, including the Securitization Program, for the year ended
February 28, 1999 was 7.0% as compared to 7.3% for the previous year.
For the year ended February 28, 1999, the Company recorded an income tax
benefit of $931,000. The Company's effective tax rate differed from the
statutory rate principally as a result of the amortization of the excess of
acquired net assets over cost (negative goodwill amortization) not being
included in taxable income.
Year ended February 28, 1998 Compared to Year Ended February 28, 1997
For the year ended February 28, 1998, net sales of $484.0 million increased
27.8% from $378.7 million for the year ended February 28, 1997. Same store
daily sales increased 8.5% for the year ended February 28, 1998 as compared to
the prior year.
Although acquisitions were a key factor in the year to year growth, the sale
of HVAC products on a same store basis increased by 15.4% for the year ended
February 28, 1998 as compared to the prior year. Increased sales in the
Company's ThermalZone(TM) private label equipment line contributed
significantly to the increase. Sales of refrigeration equipment, parts, and
supplies increased 2.6% on a daily same store basis for the year ended
February 28, 1998 as compared to the prior year.
Gross profit increased 23.7% to $115.3 million for the year ended February
28, 1998 from $93.2 million in the prior year. Increased sales volume was the
primary reason for the increase in gross profit. The gross profit percentage
decreased to 23.8% for the year ended February 28, 1998 as compared to 24.6%
for the prior year.
10
<PAGE>
During the year, the Company increased the volume of its lower margin
ThermalZone(TM) product lines at a substantially faster rate than its higher
margin refrigeration products. In addition, due to the unseasonably mild
weather in the second quarter of the current fiscal year, many smaller
distributors lowered prices to reduce their inventory levels; in these
markets, the Company implemented competitive pricing strategies.
Warehousing, selling, and administrative expenses for the year ended
February 28, 1998 increased 21.6% to $98.7 million from $81.2 million in the
prior year. A significant portion of the increase over the prior year can be
attributed to the normal operating expenses of the acquired branches. In
addition, the Company has added to its sales force to focus on sales at the
local and national account level. Warehousing, selling, and administrative
expenses as a percentage of net sales decreased to 20.4% for the year ended
February 28, 1998 from 21.4% in the prior year. For the year, the growth in
sales volume outpaced the related increase in incremental warehousing,
selling, and administrative expenses.
Interest expense during the year ended February 28, 1998 decreased to $2.0
million from $3.9 million in the previous year. The Company's average
borrowings under the Working Capital Facility (as defined below) decreased by
$814,000 in the year ended February 28, 1998. During fiscal year 1997, the
Company reduced the interest rate it pays on its borrowings by refinancing its
Credit Facilities (as defined below) and adding an accounts receivable program
(the "Securitization Program"). In addition, $43.9 million of the proceeds
from the Company's June 1997 initial public offering ("IPO"), which is further
explained below, were used to repay $11.1 million of outstanding indebtedness
to certain members and affiliates of a group of investors in the Company and
$32.8 million of the outstanding balance of the Company's Working Capital
Facility. The Securitization Program was recorded as a sale of assets;
therefore, approximately $37.4 million of accounts receivable and debt were
not reflected on the Company's balance sheet at February 28, 1998. The
discount on the sale of accounts receivable of $3.0 and $1.4 million for the
years ended February 28, 1998 and February 28, 1997, respectively, was
recorded as other expenses on the consolidated statements of income. The
average rate of interest on all debt, including the Securitization Program,
for the year ended February 28, 1998 was 7.3% as compared to 8.5% for the
previous year.
The Company's effective tax rate was lower than the statutory rate in the
years ended February 28, 1998 and 1997 as a result of the reduction of the
deferred income tax asset valuation allowance due to management's belief that
recognition of the related deferred tax assets was more likely than not. The
reductions in the valuation allowance for the years ended February 28, 1998
and 1997 were $671,000 and $7.3 million, respectively.
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, 1999, the cash
provided by operating activities was $762,000 compared to cash provided by
operating activities of $3.8 million for the year ended February 28, 1998. Net
cash used in investing activities was $51.0 million for the year ended
February 28, 1999 as compared to $50.0 million for the prior year. During the
year ended February 28, 1999, the Company purchased the HVAC operations and
related assets of Keller Supply, Inc., George L. Johnston Co., Inc., Park
Heating and Air Conditioning Supply Co., Inc., Tesco Distributors, Inc.,
Climate Supply Company, Inc. and Belleville Supply Company, Inc. for an
aggregate cash price of $45.7 million as compared to $44.6 million for the
acquisition of Bellows-Evans, Inc., Trigg Supply, Inc., Heating and Cooling
Distributors, Inc., Saez Refrigeration, Inc., Saez Refrigeration of Hialeah,
Inc., Superior Supply Company, General Heating and Cooling, Inc., and Williams
Refrigeration, Inc. in the prior year. Net cash provided by financing
activities was $50.3 million for the year ended February 28, 1999, as compared
to $46.2 million in the prior year.
The Company's working capital increased to $97.5 million at February 28,
1999 from $68.8 million at February 28, 1998.
At February 28, 1999, the Company had a $240.0 million Credit Agreement with
one primary institution and several other participating lenders. The Credit
Agreement provides for (a) a securitization commitment ("the
11
<PAGE>
Securitization Program") of $100.0 million, (b) a revolving line of credit
("the Revolver") of $90.0 million, and (c) two term loans aggregating $50.0
million ("Tranche A" and "Tranche B"). These credit commitments (collectively,
the "Credit Facilities") were increased to the present levels on October 16,
1998. The combined $240.0 million of facilities bear interest based at the
commercial paper or the Eurodollar rate plus a margin as described below.
The Company has a Securitization Program with General Electric Capital
Corporation, Redwood Receivables Corporation ("Redwood"), and Pameco
Securitization Corporation ("PSC"). The Securization Program is an off-balance
sheet arrangement that provides for the transfer and sale of accounts
receivable to PSC, a special purpose wholly-owned subsidiary, that sells the
accounts receivable to Redwood, which issues commercial paper on the Company's
behalf. The capital commitment was $50.0 million at the beginning of the
fiscal year and was increased to $100.0 million on October 16, 1998. At
February 28, 1999 and February 28, 1998, accounts receivable of $43.6 million
and $37.4 million, respectively, were sold under the Securitization Program.
The sales of such accounts receivable have been reflected as a reduction of
accounts receivable in the Company's consolidated balance sheets. 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 at February 28, 1999 and February 28, 1998 for such servicing as the
Company believes such cost is not significant. The margin on the commercial
paper rate for the Securitization Program ranges from 0.75% to 1.75%,
depending upon the Company's interest coverage ratio, and was 1.00% at
February 28, 1999. The borrowing rate at February 28, 1999 was 5.9%. The
discount on the sale of accounts receivable was $3.6 million, $3.0 million and
$1.4 million for the years ended February 28, 1999, February 28, 1998, and
February 28, 1997, and such amounts are included in other expenses on the
consolidated statements of operations.
At February 28, 1999, the Company had borrowings of $49.7 million
outstanding under the Revolver. These borrowings are due August 6, 2003. The
margin on the Eurodollar rate for the Revolver ranges from 1.50% to 2.50%,
depending upon the Company's interest coverage ratio, and was 1.75% at
February 28, 1999. The borrowing rate at February 28, 1999 was 6.7%.
The Company had aggregate borrowings of $49.2 million outstanding at
February 28, 1999 on Tranche A and Tranche B. The Tranche A term loan matures
on September 30, 2003, and the Tranche B loan matures on September 30, 2005.
The margin on the Eurodollar rate for the Tranche A ranges from 1.50% to
2.50%, depending upon the Company's interest coverage ratio, and was 1.75% at
February 28, 1999. The margin on the Eurodollar rate for the Tranche B ranges
from 2.00% to 3.00%, depending upon the Company's interest coverage ratio, and
was 2.25% at February 28, 1999.
The Company's Credit Agreement facilities include restrictive covenants
including compliance with specific levels of net worth, earnings before
interest, taxes, depreciation, and amortization ("EBITDA"), senior debt
leverage ratio, total debt leverage ratio, and fixed charge coverage ratio.
The negative covenants include various limitations on indebtedness, liens,
fundamental changes, dividends, and investments.
The Company's capital expenditures, excluding acquisitions, for the year
ended February 28, 1999, were $5.4 million as compared to $5.5 million for the
previous fiscal year. Capital expenditures in 1999 were primarily for computer
equipment and supply chain software. Capital expenditures for fiscal year 2000
are expected to total approximately $5.9 million. Of that amount,
approximately $1.3 million is anticipated to result from the Company's
continued investment in supply chain software.
Management believes that the Company has adequate resources and liquidity to
meet its borrowing obligations, fund all required capital expenditures, and
pursue its business strategy for existing operations through the end of this
fiscal year. However, the Company will 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.
12
<PAGE>
Subsequent Event
On June 11, 1999, the Company entered into an Amendment and Waiver to the
Credit Agreement (the "Amendment"). In general, the Amendment increases the
interest rates paid by the Company, shortens the maturities of the term loans,
grants certain warrants to the lenders, creates a new borrowing base reserve
and revises the financial covenants, all as described in more detail below.
The Amendment provides for the following changes to the Revolver, Tranche A
term loan and Tranche B term loan.
Revolver:
Until the Company meets certain minimum financial covenants, the margin on
the Eurodollar rate for these loans has been changed from 2.00% to 2.50%. The
borrowing base for the Revolver will be reduced by a new reserve equal to
$3,000,000 during July 1999 and equal to the outstanding balance of the
Tranche A term loan during each succeeding month.
Tranche A:
On June 11, 1999, the Company made a principal payment aggregating
$15,000,000, financed by borrowings under the Company's Revolver, and
beginning June 30, 1999 the Company must make quarterly principal payments
aggregating (a) $750,000 through September 30, 2000; (b) $1,250,000 through
June 30, 2001 and (c) $250,000 through September 30, 2001. Until the Company
meets certain minimum financial covenants, the margin on the Eurodollar rate
for these loans has been changed from 2.00% to 3.00%. The maturity date was
changed from September 30, 2003 to September 30, 2001.
Tranche B:
Beginning June 30, 1999, quarterly principal payments of $62,500 must be
made through March 31, 2001 with a balloon payment of $24,375,000 due upon
June 30, 2001. Until the Company meets certain minimum financial covenants,
the margin on the Eurodollar rate for these loans has been changed from 2.50%
to 4.50%. The maturity date was changed from September 30, 2005 to June 30,
2001. In addition, until the Company can maintain on a rolling four-quarter
basis, a consolidated senior debt leverage ratio less than or equal to 5.0 to
1 (actual at February 28, 1999 was 5.52 to 1.0), interest will accrue and
compound monthly on the principal balance of the Tranche B term loan at rates
ranging from 2% to 10% of the outstanding balance thereof. Such interest will
be due upon the earlier of the full payment of Tranche B or a refinancing of
such debt.
The Company issued detachable stock purchase warrants for shares of the
Company's Class A Common Stock. The number of shares will be determined by
dividing $7,000,000 by the closing price (as defined in the warrant) on
February 29, 2000. The warrants become exercisable by the lenders in February
2000 if (a) the Company (i) fails to maintain a consolidated debt leverage
ratio on a rolling four-quarter basis less than or equal to 5.0 to 1.0 and
(ii) Tranche B has not been refinanced in its entirety or (b) after giving
effect to any refinancing using the proceeds of the Revolver, in whole or in
part, the aggregate available commitment under the Revolver at any time shall
be less than $20,000,000. The warrants expire ten years from issuance and have
"piggyback" and demand registration rights.
In connection with the Amendment, certain financial covenants related to the
Revolver, Tranche A and Tranche B were modified to set lower levels of
compliance. In addition to the current financial covenants, the Company is now
required to meet a monthly senior debt leverage ratio and monthly targets of
earnings before interest, taxes, depreciation and amortization.
In addition, on June 11, 1999 the Company entered into Amendment Number Five
to its Securitization Program. This Amendment provides for interest based on
the commercial paper rate plus a margin from 1.75% until certain financial
covenants are met. In connection with this Amendment, certain financial
covenants were modified to set lower levels of compliance. In addition, the
Company is now required to meet a quarterly senior fixed charge ratio and
quarterly targets of earnings before interest, taxes, depreciation and
amortization.
13
<PAGE>
Seasonality
The sale of products by the Company is seasonal. Sales generally increase
during the warmer months beginning in April and peak in the months of June,
July, and August.
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 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 certain suppliers to
reduce acquisition costs in order to maintain a reasonable margin on its
sales.
Year 2000
The Company utilizes computer systems and software that are affected by the
Year 2000 issue. Many computer programs were originally designed to utilize
two digits instead of four to define the applicable year. As a result, a
computer program might recognize a date using "00" as the year 1900 rather
than 2000 which could cause system failures or miscalculations. The Company's
operations could be adversely affected by Year 2000 issues.
The Company has separated its Year 2000 project into four phases. During
Phase I, Millennium Impact Analysis, the Company reviewed all its business
segments for Year 2000 issues. The Company categorized all of its hardware,
software, and other equipment as either compliant, non-compliant, or as
requiring research. The Company also contacted its largest customers and most
critical suppliers. To date, 35% of such customers and 86% of the critical
suppliers have responded. The Company is in the process of contacting the non-
respondents to determine the level of risk. As a part of Phase II, Project
Tactical Planning, a project budget and work plan for achieving Year 2000
compliance were developed. The majority of the work plan was devoted to
replacing the non-compliant supply chain and financial management systems.
Replacing non-compliant point of sale ("POS") systems and telephone systems
was also identified as a major task. Currently, the Company is in the midst of
Phase III, Conversion and System Training. Since the Company has successfully
implemented its new enterprise software, it is now 94% compliant. To be fully
compliant, the Company must replace its telephone systems and POS equipment in
some of its branches. Since this process is approximately 85% complete, the
Company believes that it will complete this phase by September 1999. In the
final phase, Phase IV, Year 2000 Simulation and Deployment, the Company will
perform simulation testing to confirm that all systems are compliant. During
this phase, the Company will age its database and model its business
applications as if it were January 3, 2000. The Company intends to conduct
this testing in September 1999.
The Company has completed the replacement and upgrade of its supply chain
and financial management systems and software that enable it to respond more
efficiently to the needs of its customers. The Company believes that the new
system is Year 2000 compliant. The Company has also targeted non-compliant POS
hardware and software for replacement. For the Company's operations to
continue uninterrupted, certain key third parties, such as banks, customers,
and vendors, must resolve all the Year 2000 issues affecting them. Previously,
the Company mailed surveys to these key third parties. As of this date, all
responses have indicated that these parties will be Year 2000 compliant. The
Company will continue to solicit surveys from unresponsive parties, as well as
continue to monitor the status of key third parties.
Since the Company chose to replace its main operating system primarily to
improve customer service, the costs associated with this implementation are
not considered Year 2000 related costs. The Company has budgeted $325,000 for
the replacement and upgrading of POS hardware and software. To date, the
Company has expended approximately $150,000 for this portion of the project.
The Company anticipates spending an additional
14
<PAGE>
$175,000 to complete the project. The Company has budgeted an additional
$650,000 to replace non-compliant telephone systems, security systems, and
office equipment. The Company anticipates these replacements will be completed
by November 1999. The costs for the replacement of these systems will be
funded through the Working Capital Facility. The Company is expecting to
capitalize these costs as they are incurred. The Company has not materially
deferred any other projects in order to achieve Year 2000 compliance.
In the worst case scenario, several of the Company's branches could be
without basic utility services for an extended period of time. The Company
could also suffer unanticipated hardware or software failures. As a result,
the Company may not be able to timely provide reliable data to management. The
Company is also concerned that a number of its key suppliers might not be in
compliance with Year 2000 requirements as of January 1, 2000. If any one of
the financial institutions with whom the Company transacts business was non-
compliant, the Company's ability to borrow funds, process customer receipts
and vendor payments, and successfully complete other transactions may be
adversely affected. The Company is in the process of developing a contingency
plan that would allow it to continue its operations even if such a disruption
to vital services were to occur although the specifics of such plan are not
expected to be finalized until the fall of 1999. In particular, the Company is
in the process of developing procedures to process transactions manually in
the event of the loss of power at any of its locations. As other potential
risk areas become apparent, the Company intends to develop alternative
solutions. However, if the Company, its vendors, or its customers, are unable
to resolve their significant Year 2000 issues, it could result in a material
financial risk.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to changes in interest rates due to the Company's
variable rate debt. Based on the Company's debt profile at February 28, 1999,
a 1% increase in market interest rates would increase interest expense and
decrease income before income taxes by $392,000. These amounts were determined
by calculating the effect of the hypothetical interest rate on the Company's
floating debt rate, after giving consideration to the Company's interest rate
swap agreements and other risk management instruments. These amounts do not
include the effects of certain potential results of increased interest rates,
such as a reduced level of overall economic activity or other actions
management may take to mitigate this risk. Furthermore, this sensitivity
analysis does not assume changes in the Company's financial structure that
could occur if interest rates were higher.
15
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
Board of Directors Pameco Corporation
We have audited the accompanying consolidated balance sheets of Pameco
Corporation as of February 28, 1999, and February 28, 1998, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended February 28, 1999. These financial statements
are the responsibility of the Company's management. Our audits also included
the financial statement schedule listed in Part IV, Item 14(a). Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pameco
Corporation at February 28, 1999 and February 28, 1998, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended February 28, 1999. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
May 21, 1999, except for the Subsequent Event section of Note 4 as to which
the date is June 11, 1999.
16
<PAGE>
PAMECO CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 148 $ 142
Accounts receivable, less allowance of $6,210 at
February 28, 1999
and $3,992 at February 28, 1998.................... 35,507 35,266
Inventories......................................... 157,621 123,041
Prepaid expenses and other current assets........... 4,149 1,554
-------- --------
Total current assets............................... 197,425 160,003
Property and equipment, net.......................... 15,694 11,603
Excess of cost over acquired net assets, net......... 44,948 25,613
Other assets......................................... 682 806
Deferred income tax assets........................... 15,139 12,787
-------- --------
Total assets....................................... $273,888 $210,812
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.................................... $ 68,521 $ 60,323
Accrued compensation and withholdings............... 4,661 5,115
Other accrued liabilities and expenses.............. 23,148 18,056
Note payable........................................ -- 7,700
Current portion of capital lease obligations and
other debt......................................... 3,575 56
-------- --------
Total current liabilities.......................... 99,905 91,250
Long-term liabilities:
Debt................................................ 95,608 42,072
Capital lease obligations........................... -- 148
Warranty reserves................................... 3,675 3,691
-------- --------
Total long-term liabilities........................ 99,283 45,911
Excess of acquired net assets over cost, net......... 4,160 4,999
Shareholders' equity:
Class A Common stock, $.01 par value--authorized
40,000 shares; 5,226 and
4,665 shares issued and outstanding at February 28,
1999 and February 28, 1998, respectively........... 52 47
Class B Common stock, $.01 par value--authorized
20,000 shares; 3,831 and
4,046 shares issued and outstanding at February 28,
1999 and February 28, 1998, respectively........... 38 41
Capital in excess of par value...................... 38,966 37,092
Retained earnings................................... 31,884 32,072
-------- --------
70,940 69,252
Note receivable from shareholder.................... (400) (600)
-------- --------
Total shareholders' equity......................... 70,540 68,652
-------- --------
Total liabilities and shareholders' equity......... $273,888 $210,812
======== ========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 28, February 28, February 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................... $625,042 $484,010 $378,658
Costs and expenses:
Cost of products sold.................. 478,093 368,685 285,439
Warehousing, selling, and
administrative expenses............... 134,662 98,715 81,180
Severance.............................. 1,532 -- --
Executive cash bonus................... -- -- 2,173
Restructuring.......................... 4,025 -- --
Amortization of excess of cost over
acquired net assets................... 1,023 381 70
Amortization of excess of acquired net
assets over cost...................... (1,224) (1,224) (1,224)
-------- -------- --------
618,111 466,557 367,638
-------- -------- --------
Operating earnings...................... 6,931 17,453 11,020
Other expenses:
Interest expense, net.................. (5,146) (1,980) (3,923)
Discount on sale of accounts receivable
and other expenses, net............... (2,904) (3,086) (1,533)
-------- -------- --------
(Loss) income before income taxes....... (1,119) 12,387 5,564
(Benefit) provision for income taxes.... (931) 3,541 (5,592)
-------- -------- --------
Net (loss) income....................... (188) 8,846 11,156
Redeemable preferred stock dividends.... -- -- 424
-------- -------- --------
Net (loss) income applicable to common
shareholders........................... $ (188) $ 8,846 $ 10,732
======== ======== ========
Basic (loss) earnings per share......... $ (0.02) $ 1.14 $ 1.82
======== ======== ========
Basic weighted average shares
outstanding............................ 8,802 7,779 5,910
======== ======== ========
Diluted (loss) earnings per share....... $ (0.02) $ 1.08 $ 1.71
======== ======== ========
Diluted weighted average shares
outstanding............................ 8,802 8,183 6,261
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Class A Class B Common Capital in
Common Common Common Stock Excess of Note Treasury Retained
Stock Shares Stock Shares Stock Shares Amount Par Value Receivable Stock Earnings Total
------------ ------------ ------------ ------ ---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at February 29,
1996................... 6,250 -- -- $63 $ 937 $ -- $ -- $12,494 $13,494
Purchase of treasury
stock.................. (1,250) -- -- -- -- -- (10,500) -- (10,500)
Sale 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
Conversion of Common
Stock to Class A
shares................. (1,125) 1,125 -- -- -- -- -- -- --
Conversion of Common
Stock to Class B
shares................. (3,983) -- 3,983 -- -- -- -- -- --
Issuance of common
stock, net of
expenses............... -- 3,536 -- 35 45,098 -- -- -- 45,133
Purchase of treasury
stock.................. -- (207) -- -- -- -- (1,207) -- (1,207)
Retirement of treasury
stock.................. -- -- -- (13) (11,694) -- 11,707 -- --
Note receivable from
shareholder............ -- 63 -- -- 600 (600) -- -- --
Proceeds from exercise
of common stock
warrants............... -- -- 63 1 524 -- -- -- 525
Proceeds from exercise
of stock options....... -- 148 -- 1 723 -- -- -- 724
Net income.............. -- -- -- -- -- -- -- 8,846 8,846
------ ----- ----- --- ------- ----- ------- ------- -------
Balances at February 28,
1998................... -- 4,665 4,046 88 37,092 (600) -- 32,072 68,652
Forgiveness of note
receivable from CEO.... -- -- -- -- -- 200 -- -- 200
Conversion of Class B
shares to Class A
shares................. -- 215 (215) -- -- -- -- -- --
Proceeds from the
issuance of shares
under Employee Stock
Purchase Plan.......... -- 31 -- -- 425 -- -- -- 425
Proceeds from exercise
of stock options....... -- 315 -- 2 1,449 -- -- -- 1,451
Net loss................ -- -- -- -- -- -- -- (188) (188)
------ ----- ----- --- ------- ----- ------- ------- -------
Balances at February 28,
1999................... -- 5,226 3,831 $90 $38,966 $(400) $ -- $31,884 $70,540
====== ===== ===== === ======= ===== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 28, February 28, February 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income....................... $ (188) $ 8,846 $ 10,732
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Amortization of excess of acquired net
assets over cost...................... (1,224) (1,224) (1,224)
Amortization of excess of cost over
acquired net assets................... 1,023 381 70
Depreciation........................... 2,459 1,596 1,107
Loss on sale of property and
equipment............................. 30 66 2
Deferred income taxes.................. (1,659) (904) (6,500)
Changes in operating assets and
liabilities net of assets acquired and
liabilities assumed:
Accounts receivable.................. 10,481 (2,309) 23,380
Inventories, prepaid expenses and
other assets........................ (16,902) 10,467 (16,294)
Accounts payable and accrued
liabilities......................... 6,742 (13,126) 24,054
--------- --------- ---------
Net cash provided by operating
activities............................. 762 3,793 35,327
Cash flows from investing activities
Purchases of property and equipment..... (5,369) (5,546) (2,128)
Proceeds from sales of property and
equipment.............................. 9 126 82
Business acquisitions................... (45,685) (44,580) (26,560)
--------- --------- ---------
Net cash used in investing activities... (51,045) (50,000) (28,606)
Cash flows from financing activities
Borrowings on working capital facility.. 757,117 562,426 430,405
Repayments on working capital facility.. (749,519) (550,072) (434,045)
Borrowings on term debt................. 50,000 -- --
Repayments on term debt................. (813) -- --
Issuance (repayments) on notes to
affiliate.............................. -- (18,600) 11,100
(Repayments) borrowings on note
payable................................ (7,700) 7,700 --
Payments on capital lease obligations
and other debt......................... (672) (425) (556)
Redemption of preferred stock........... -- -- (4,000)
Issuance of common stock, net of
offering expenses...................... -- 45,133 905
Purchases of treasury stock............. -- (1,207) (10,500)
Proceeds from exercise of stock options,
warrants and sales to employee stock
purchase plan.......................... 1,876 1,249 --
--------- --------- ---------
Net cash provided by (used in) financing
activities............................. 50,289 46,204 (6,691)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ 6 (3) 30
Cash and cash equivalents at beginning
of year................................ 142 145 115
--------- --------- ---------
Cash and cash equivalents at end of
year................................... $ 148 $ 142 $ 145
========= ========= =========
Supplemental disclosure of noncash
financing activities
Issuance of common stock in exchange for
note receivable........................ $ -- $ 600 $ --
========= ========= =========
Forgiveness of note receivable from
Chief Executive Officer in connection
with sale of Common Stock.............. $ 200 $ -- $ --
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999
1. Summary of Significant Accounting Policies and Other Matters
Principles of Consolidation
The consolidated financial statements include the accounts of Pameco
Corporation and its wholly-owned subsidiaries (collectively the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Description of Business
The Company is a nationwide wholesale distributor of heating, ventilation
and air conditioning ("HVAC") and refrigeration equipment, with 361 branches
located in 47 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 operates in
one business segment.
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 year ended February 28, 1999,
the Company's second fiscal quarter accounted for $210.3 million of its net
sales and $15.5 million of its annual operating earnings.
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
On June 4, 1997, the Company completed an initial public offering ("IPO") of
its Class A Common Stock. A total of 4,115,441 shares were sold at $14 per
share, including 536,797 shares sold pursuant to the underwriters
overallotment option and 578,644 shares sold by certain selling shareholders.
The Company did not receive any of the proceeds from the sale of shares of
Class A Common Stock by the selling shareholders. The net proceeds to the
Company were approximately $45.1 million and were used to repay $11.1 million
of outstanding indebtedness to certain members and affiliates of a group of
investors in the Company, to repay approximately $32.8 million of the
outstanding balance of the Company's $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 aforementioned investor
group, for an aggregate purchase price of approximately $1.2 million.
On June 3, 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. In general, the Company's
Class A Common Stock entitles its holder to one vote per share, whereas the
Class B Common Stock entitles its holder to ten votes per share.
Prior to the IPO, certain shareholders of the Company agreed to sell to the
Company shares of Common Stock equal to the number of shares issued as certain
stock options were exercised at a price equal to the exercise price of such
stock options. The Company repurchased all of the 206,847 shares subject to
this arrangement at the time of the IPO from such investors, and such shares
have been retired. Upon exercise of these stock options, the Company issues
its Class A Common Stock.
21
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
1. Summary of Significant Accounting Policies and Other Matters--(continued)
Cash Equivalents
For purposes of the accompanying statements of cash flows, the Company
considers all highly liquid investments purchased with an original 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 fiscal 1999, the Company purchased approximately $491.9 million of
equipment for resale, of which approximately 43.1% was obtained from its top
five suppliers, while the 25 largest suppliers accounted for approximately
70.9% of total purchases. No single supplier accounted for more than 13.3% of
the Company's total purchases. To help ensure adequate future inventory supply
sources, the Company maintains supply relationships with numerous other
vendors.
The Company maintained reserves for excess and idle inventory aggregating
$7.3 million and $4.2 million as of February 28, 1999 and February 28, 1998,
respectively.
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 fourteen business
acquisitions beginning in fiscal 1997. Such amounts are being amortized on a
straight-line basis over 40 years. Accumulated amortization of the excess of
cost over acquired net assets was approximately $1.5 million and $451,000 at
February 28, 1999 and February 28, 1998, respectively.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of the excess of cost over acquired net assets
may not be recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of the excess of cost over
acquired net assets by determining whether the carrying value of such excess
of cost over acquired net assets will be recovered through undiscounted
expected future cash flows. Should the Company determine that the carrying
values of the excess of cost over acquired net assets are not recoverable, the
Company would record a charge to reduce the carrying values of such assets to
their fair values.
Excess of Acquired Net Assets Over Cost
Excess of the acquired net assets over cost which is the result of the
bargain purchase on the original purchase of the Company in March 1992 is
being amortized on a straight-line basis over 10 years. Accumulated
amortization of the excess of acquired net assets over cost was approximately
$8.4 and $7.2 million at February 28, 1999 and February 28, 1998,
respectively.
22
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
1. Summary of Significant Accounting Policies and Other Matters--(continued)
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 will differ from those estimates, and such
differences could be material to the financial statements.
Credit Policy
The Company performs periodic credit evaluations of its customers' financial
condition and in some instances places liens on sales of equipment. Accounts
receivable 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 income 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 June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company expects to adopt the new
Statement effective March 1, 2001. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on the results of operations or financial position.
Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 128.
Basic earnings per share is computed by dividing net income by the total of
the weighted average number of shares outstanding. Diluted earnings per share
additionally assumes conversion of any dilutive common stock equivalents.
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 instruments approximate the reported amounts
in the consolidated balance sheets as their respective interest rates
approximate the market rates for similar debt instruments.
The unrealized gain for the interest rate swap agreements was approximately
$1.6 million at February 28, 1999 based on evaluations made by the
counterparties to the interest rate swap agreements. The Company does not
anticipate realization of this gain as the Company intends to hold the
interest rate swap agreements to maturity.
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 approximately 29.6% and 46.5% of the stock of the Company
at February 28, 1999 and February 28, 1998, respectively. Three Cities
Research, Inc. is paid an annual fee of $50,000 for advisory services and is
reimbursed for expenses.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year presentation.
23
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
2. Acquisitions
All acquisitions have been accounted for under the purchase method of
accounting. Under the purchase method of accounting, the results of operations
of the acquired companies are included in the consolidated statements of
operations as of the acquisition dates. The assets and liabilities of the
companies acquired in fiscal 1999 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 is being
amortized on a straight-line basis over 40 years. The estimated net sales
information for the fiscal year prior to acquisition of the acquired companies
is unaudited.
Fiscal Year Ended February 28, 1999
In March 1998, the Company purchased the HVAC operations and related assets
of Keller Supply, Inc., a distributor of HVAC equipment in Huntsville,
Alabama, a new market for the Company. The acquired business had net sales in
excess of $2.0 million for the year ended December 31, 1997 and derived
substantially all its net sales from the sale of HVAC products.
In May 1998, the Company purchased the HVAC and refrigeration operations and
related assets of George L. Johnston Co., Inc., a 10 branch distributor in
Michigan and Ohio. Two of the branches are in the top 100 Standard
Metropolitan Statistical Areas ("SMSAs") not previously served by the Company.
The acquired business had net sales in excess of $20.0 million for the year
ended October 31, 1997 and derived substantially all its net sales from the
sale of HVAC and refrigeration products.
In June 1998, the Company purchased the HVAC operations and substantially
all the related assets of Park Heating and Air Conditioning Supply Co.
("Park"), Inc., a seven branch distributor in the greater Chicago area. For
the year ended December 31, 1997, the acquired business had net sales in
excess of $30.0 million and derived substantially all its net sales from the
sale of HVAC products. The purchase price for Park aggregated $22.5 million.
In November 1998, the Company purchased the HVAC operations and
substantially all the related assets of Tesco Distributors, Inc., a six branch
distributor in the New York City and New Jersey markets. One of the branches
is in a top 100 SMSA not previously served by the Company. For the year ended
November 30, 1997, the acquired business had net sales in excess of $14.0
million and derived substantially all its net sales from HVAC and
refrigeration products.
In November 1998, the Company purchased the HVAC operations and
substantially all the related assets of Climate Supply Company, Inc., a six
branch distributor in the Dallas market. One of the branches is in a top
100 SMSA not previously served by the Company. For the year ended October 31,
1997, the acquired business had net sales in excess of $7.0 million and
derived substantially all its net sales from HVAC and refrigeration products.
In January 1999, the Company purchased the HVAC operations and substantially
all the related assets of Belleville Supply Company, Inc., a three branch
distributor in the Virginia market. For the year ended December 31, 1998, the
acquired business had net sales in excess of $14.0 million and derived
substantially all its net sales from HVAC products.
Fiscal Year Ended February 28, 1998
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.
24
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
2. Acquisitions--(Continued)
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 $2.0 million for the year
ended December 31, 1996 and derived all of its revenues from the sale of HVAC
products.
In July 1997, the Company purchased the HVAC operations and related assets
of Heating Cooling Distributors, Inc., a distributor of HVAC equipment in
Indianapolis, Indiana, a new market for the Company. The acquired business had
revenues in excess of $2.0 million for the year ended December 31, 1996 and
derived substantially all of its revenues from the sale of HVAC products.
In August 1997, the Company purchased the HVAC operations and related assets
of Saez Refrigeration, Inc., and Saez Refrigeration of Hialeah, Inc. a
distributor of HVAC equipment in Miami, Florida. The acquired businesses had
revenues in excess of $13.0 million for the year ended December 31, 1996 and
derived substantially all of their revenues from the sale of HVAC products.
In August 1997, the Company purchased the HVAC operations and related assets
of Superior Supply Company, a distributor of HVAC equipment in the Midwest. Of
the 13 locations, ten were in new markets for the Company. The acquired
business had revenues in excess of $20.0 million for the year ended January
31, 1997 and derived substantially all of its revenues from the sale of HVAC
and refrigeration products.
In September 1997, the Company purchased the HVAC operations and related
assets of General Heating and Cooling Company, a distributor of HVAC equipment
in the Midwest. Two of the 11 locations acquired are in the top 100 SMSAs. The
acquired business had revenues in excess of $25.0 million for the year ended
December 31, 1996 and derived substantially all of its revenues from the sale
of HVAC products.
In December 1997, the Company purchased the refrigeration operations and
related assets of Williams Refrigeration, Inc., a distributor of refrigeration
equipment in the East. Eight of the 26 locations acquired are in the top 100
SMSAs. The acquired business has annual revenues of approximately $30.0
million and derived substantially all of its revenues from the sale of
refrigeration products.
Fiscal Year Ended February 28, 1997
In May 1996, the Company acquired Chase Supply Company ("Chase"), a six
branch wholesaler of refrigeration and HVAC equipment and supplies in the
greater Chicago area.
In November 1996, the Company acquired certain assets of Sid Harvey
Industries ("Sid Harvey"). The Sid Harvey acquisition consisted of 52 branches
which sell refrigeration and HVAC equipment and supplies throughout the
southeastern United States.
Pro Forma Data
The following table summarizes unaudited pro forma financial information of
the Company as if the June 1998 acquisition of Park Heating and Air
Conditioning Supply Co., Inc. had occurred as of March 1, 1997. Pro forma
results have not been presented for those acquisitions which were not
significant during the periods presented. 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 acquisition had occurred on March 1, 1997,
and should not serve as a forecast of the Company's operating results for any
future periods.
The adjustments to the historical data reflect the following: (i) interest
expense assuming the Company financed the acquisition at a rate of 7.3%; (ii)
amortization of the excess of cost over acquired net assets;
25
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
2. Acquisitions--(continued)
(iii) income taxes on the earnings of the acquiree adjusted to reflect the
Company's effective tax rate; and (iv) the income tax effect of such pro forma
adjustments. The pro forma adjustments are based on the available information
and certain assumptions that management believes are reasonable.
<TABLE>
<CAPTION>
Year Ended
-------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
(In thousands)
Net sales........................................... $635,705 $518,105
======== ========
Net income.......................................... $ 68 $ 9,176
======== ========
Basic earnings per share............................ $ 0.01 $ 1.18
======== ========
Basic weighted average shares outstanding........... 8,082 7,779
======== ========
Diluted earnings per share.......................... $ 0.01 $ 1.12
======== ========
Diluted weighted average shares outstanding......... 9,118 8,183
======== ========
3. Property and Equipment
The components of property and equipment are as follows:
<CAPTION>
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
(In thousands)
Buildings and leasehold improvements................ $ 2,751 $ 2,166
Machinery and equipment............................. 3,051 2,697
Furniture, office, and computer equipment........... 18,331 13,504
-------- --------
24,133 18,367
Accumulated depreciation............................ (8,439) (6,764)
-------- --------
$ 15,694 $ 11,603
======== ========
4. Debt
The components of debt are as follows:
<CAPTION>
February 28, February 28,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
Working capital facility............................ $ 49,670 $ 42,072
Term Loans.......................................... 49,187 --
Note payable........................................ -- 7,700
Other............................................... 326 204
-------- --------
99,183 49,976
Less current portion of debt........................ (3,575) ( 7,756)
-------- --------
$ 95,608 $ 42,220
======== ========
</TABLE>
At February 28, 1999, the Company had a $240.0 million Credit Agreement with
one primary institution and several other participating lenders. The Credit
Agreement provides for (a) a securitization commitment ("the
26
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
4.Debt--(continued)
Securitization Program") of $100.0 million; (b) a revolving line of credit
("the Revolver") of $90.0 million; and (c) two term loans aggregating $50.0
million ("Tranche A" and "Tranche B"). These credit commitments (collectively,
the "Credit Facilities") were increased to the present levels on October 16,
1998. The combined $240.0 million of facilities bear interest based at the
commercial paper or the Eurodollar rate plus a margin as described below.
The Company has a Securitization Program with General Electric Capital
Corporation, Redwood Receivables Corporation ("Redwood"), and Pameco
Securitization Corporation ("PSC"). The Securization Program is an off-balance
sheet arrangement that provides for the transfer and sale of accounts
receivable to PSC, a special purpose wholly-owned subsidiary, that sells the
accounts receivable to Redwood, which issues commercial paper on the Company's
behalf. The capital commitment was $50.0 million at the beginning of the
fiscal year and was increased to $100.0 million on October 16, 1998. At
February 28, 1999 and February 28, 1998, accounts receivable of $43.6 million
and $37.4 million, respectively, were sold under the Securitization Program.
The sales of such accounts receivable have been reflected as a reduction of
accounts receivable in the Company's consolidated balance sheets. 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 at February 28, 1999 and February 28, 1998 for such servicing as the
Company believes such cost is not significant. The margin on the commercial
paper rate for the Securitization Program ranges from 0.75% to 1.75%,
depending upon the Company's interest coverage ratio, and was 1.00% at
February 28, 1999. The borrowing rate at February 28, 1999 was 5.9%. The
discount on the sale of accounts receivable was $3.6 million, $3.0 million and
$1.4 million for the years ended February 28, 1999, February 28, 1998, and
February 28, 1997, and such amounts are included in other expenses on the
consolidated statements of operations.
At February 28, 1999, the Company had borrowings of $49.7 million
outstanding under the Revolver. These borrowings are due August 6, 2003. The
margin on the Eurodollar rate for the Revolver ranges from 1.50% to 2.50%,
depending upon the Company's interest coverage ratio, and was 1.75% at
February 28, 1999. The borrowing rate at February 28, 1999 was 6.7%.
The Company had aggregate borrowings of $49.2 million outstanding at
February 28, 1999 on Tranche A and Tranche B. The Tranche A term loan matures
on September 30, 2003, and the Tranche B loan matures on September 30, 2005.
The margin on the Eurodollar rate for the Tranche A ranges from 1.50% to
2.50%, depending upon the Company's interest coverage ratio, and was 1.75% at
February 28, 1999. The margin on the Eurodollar rate for the Tranche B ranges
from 2.00% to 3.00%, depending upon the Company's interest coverage ratio, and
was 2.25% at February 28, 1999.
The Company has entered into two interest rate swap agreements to modify the
interest characteristics of a portion of its outstanding debt. The agreements
involve the exchange of amounts based on a variable interest rate for amounts
based on a fixed interest rate over the lives of the agreements without an
exchange of the notional amounts upon which the payments are based. The
Company specifically designates interest rate swaps as hedges of debt
instruments and recognizes interest differentials as adjustments to interest
expense in the period they occur. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment of interest
expense related to the debt (the accrual accounting method). The related
amount payable to, or receivable from, counter-parties is included in other
liabilities or assets. The fair value of the swap agreements is not recognized
in the financial statements. If, in the future, an interest rate swap
agreement were terminated, any resulting gain or loss would be deferred and
amortized to interest expense over the remaining
27
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
4. Debt--(continued)
life of the hedged debt instrument. In the event of early extinguishment of a
designated debt obligation, any realized or unrealized gain or loss from the
swap would be recognized in operations coincident with the extinguishment.
The interest rate swap agreements changed floating interest rate expense on
amounts outstanding under the Credit Agreement. Under one interest rate swap
agreement, the Company has fixed $40.0 million of its floating rate debt at a
rate of 4.71% through October 19, 2001. Under another interest rate swap
agreement, the Company has fixed $20.0 million of its floating rate debt at a
rate of 4.96% through October 20, 2003.
The Company's Credit Agreement facilities include restrictive covenants
including compliance with specific levels of net worth, earnings before
interest, taxes, depreciation, and amortization ("EBITDA"), senior debt
leverage ratio, total debt leverage ratio, and fixed charge coverage ratio.
The negative covenants include various limitations on indebtedness, liens,
fundamental changes, dividends, and investments.
In September 1997, the Company issued a $7.7 million promissory note in
connection with an acquisition. On March 2, 1998, that amount was repaid.
Aggregate maturities and other required reductions of debt for the next five
fiscal years are: 2000--$3.6 million; 2001--$3.8 million; 2002--$5.8 million;
2003--$56.9 million; 2004--$8.4 million; and thereafter $20.7 million.
Interest paid was $4.2 million, $2.5 million, and $3.0 million for the years
ended February 28, 1999, February 28, 1998 and February 29, 1997,
respectively.
Subsequent Event
On June 11, 1999, the Company entered into an Amendment and Waiver to the
Credit Agreement (the "Amendment"). In general, the Amendment increases the
interest rates paid by the Company, shortens the maturities of the term loans,
grants certain warrants to the lenders, creates a new borrowing base reserve
and revises the financial covenants, all as described in more detail below.
The Amendment provides for the following changes to the Revolver, Tranche A
term loan and Tranche B term loan.
Revolver:
Until the Company meets certain minimum financial covenants, the margin on
the Eurodollar rate for these loans has been changed from 2.00% to 2.50%. The
borrowing base for the Revolver will be reduced by a new reserve equal to
$3,000,000 during July 1999 and equal to the outstanding balance of the
Tranche A term loan during each succeeding month.
Tranche A:
On June 11, 1999, the Company made a principal payment aggregating
$15,000,000, financed by borrowings under the Company's Revolver, and
beginning June 30, 1999 the Company must make quarterly principal payments
aggregating (a) $750,000 through September 30, 2000; (b) $1,250,000 through
June 30, 2001 and (c) $250,000 through September 30, 2001. Until the Company
meets certain minimum financial covenants, the margin on the Eurodollar rate
for these loans has been changed from 2.00% to 3.00%. The maturity date was
changed from September 30, 2003 to September 30, 2001.
Tranche B:
Beginning June 30, 1999, quarterly principal payments of $62,500 must be
made through March 31, 2001 with a balloon payment of $24,375,000 due upon
June 30, 2001. Until the Company meets certain minimum financial covenants,
the margin on the Eurodollar rate for these loans has been changed from 2.50%
to 4.50%.
28
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1998
4. Debt--(continued)
The maturity date was changed from September 30, 2005 to June 30, 2001. In
addition, until the Company can maintain on a rolling four-quarter basis, a
consolidated senior debt leverage ratio less than or equal to 5.0 to 1.0
(actual at February 28, 1999 was 5.52 to 1.0), interest will accrue and
compound monthly on the principal balance of the Tranche B term loan at rates
ranging from 2% to 10% of the outstanding balance thereof. Such interest will
be due upon the earlier of the full payment of Tranche B or a refinancing of
such debt.
The Company issued detachable stock purchase warrants for shares of the
Company's Class A Common Stock. The number of shares will be determined by
dividing $7,000,000 by the closing price (as defined in the warrant) on
February 29, 2000. The warrants become exercisable by the lenders in February
2000 if (a) the Company (i) fails to maintain a consolidated debt leverage
ratio on a rolling four-quarter basis less than or equal to 5.0 to 1.0 and
(ii) Tranche B has not been refinanced in its entirety or (b) after giving
effect to any refinancing using the proceeds of the Revolver, in whole or in
part, the aggregate available commitment under the Revolver at any time shall
be less than $20,000,000. The warrants expire ten years from issuance and have
"piggyback" and demand registration rights.
In connection with the Amendment, certain financial covenants related to the
Revolver, Tranche A and Tranche B were modified to set lower levels of
compliance. In addition to the current financial covenants, the Company is now
required to meet a monthly senior debt leverage ratio and monthly targets of
earnings before interest, taxes, depreciation and amortization.
In addition, on June 11, 1999 the Company entered into Amendment Number Five
to its Securitization Program. This Amendment provides for interest based on
the commercial paper rate plus a margin from 1.75% until certain financial
covenants are met. In connection with this Amendment, certain financial
covenants were modified to set lower levels of compliance. In addition, the
Company is now required to meet a quarterly senior fixed charge ratio and
quarterly targets of earnings before interest, taxes, depreciation and
amortization.
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 year ended February 28, 1997.
6. Stock-Based Compensation
The Board of Directors and shareholders of the Company approved an Employee
Stock Purchase Plan that became effective on January 1, 1998. The purpose of
the Plan is to provide an opportunity for employees to purchase shares of the
Class A Common Stock, par value $.01 per share, of the Company through payroll
deductions. A total of 500,000 shares of Common Stock, including a maximum of
100,000 shares in any calendar year, are available for purchase under the
Plan.
The Company's Employee Stock Option Plan provides that 1,050,000 stock
options may be granted to key employees, including officers and directors, to
purchase common stock at fair market value. The stock options typically vest
one-third at the date of grant with the remainder vesting incrementally over a
two-year period and expire five years from the date granted. Additionally, the
Company has a stock option plan which provides for the granting of 112,500
stock options to outside directors and a separate issuance of 515,625 stock
options to the Company's former CEO.
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 fair value of the underlying stock
on the date of grant, no compensation expense is recognized.
29
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
6. Stock-Based Compensation--(continued)
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 SFAS 123.
The fair value of stock options granted during the years ended February 28,
1999 and February 28, 1998 was estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year Ended
-------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Expected life in years............................. 2-5 2-6
Risk-free interest rate............................ 4.33-6.50% 5.525-6.50%
Expected volatility................................ 60.0% 55.1%
Dividend yield..................................... 0% 0%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, 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.
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 28, February 28,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Pro forma net (loss) income...................... $(1,050) $8,055
======= ======
Pro forma basic (loss) earnings per share
applicable to common shareholders............... $ (0.12) $ 1.04
======= ======
Pro forma diluted (loss) earnings per share
applicable to common shareholders............... $ (0.12) $ 0.98
======= ======
</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.
30
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
6. Stock-Based Compensation--(continued)
A summary of the status of the Company's stock option activity, and related
information for the years ended February 28, 1999, February 28, 1998, and
February 29, 1997, is as follows:
<TABLE>
<CAPTION>
February 28, 1999 February 28, 1998 February 28, 1997
------------------- ------------------- ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 674,613 $ 7.40 966,312 $ 5.61 349,125 $3.44
Granted............... 497,500 19.33 49,750 17.68 634,063 6.75
Exercised............. (312,321) 6.44 (334,401) 3.70 (4,083) 1.67
Cancelled............. (157,208) 19.38 (7,048) 7.71 (12,793) 4.03
Expired............... (375) 4.80 -- -- -- --
--------- --------- --------
Outstanding at end of
year................... 702,209 13.86 674,613 7.40 966,312 5.61
========= ========= ========
Exercisable at end of
year................... 381,375 624,885 473,693
========= ========= ========
Options available for
future grant........... 294,486 284,403 305,230
========= ========= ========
Weighted average fair
value of options
granted during the
year................... $ 19.33 $ 17.68 $ 6.75
========= ========= ========
</TABLE>
The following table summarizes information about stock options outstanding
at February 28, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices February 28, 1999 Life Price February 28, 1999 Price
- ------------------------ ----------------- ----------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$4.80-$6.40............. 250,442 1.8 $ 6.36 250,442 $ 6.36
$8.00-$9.60............. 50,517 2.6 8.70 50,517 8.71
$17.13-$19.63........... 401,250 4.2 19.18 80,416 18.37
------- -------
702,209 381,375
======= =======
</TABLE>
31
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
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 28, 1999 and February
28, 1998 are as follows:
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
Deferred income tax assets:
Accounts receivable reserves................... $ 1,448 $ 2,120
Inventory reserves............................. 6,436 4,046
Extended product warranties.................... 2,131 1,844
Restructuring reserve.......................... 2,146 --
Other.......................................... 3,099 4,991
Alternative minimum tax credit................. 1,019 926
------- -------
Total deferred income tax assets................. 16,279 13,927
Valuation allowance for deferred income tax as-
sets............................................ (1,140) (1,140)
------- -------
Net deferred income tax assets................... $15,139 $12,787
======= =======
</TABLE>
The cumulative alternative minimum tax credit generated in prior years can
be carried forward indefinitely to offset regular federal income tax expense
in future periods.
The components of (benefit) provision for income taxes for the years ended
February 28, 1999, February 28, 1998 and February 28, 1997 are as follows:
<TABLE>
<CAPTION>
February 28, February 28, February 28,
1999 1998 1997
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal income taxes.............. $ 492 $ 2,920 $ 584
State, local, and foreign income
and franchise taxes.............. 236 380 324
------- ------- -------
Deferred: 728 3,300 908
Federal and state income taxes.... (1,659) 241 (6,500)
------- ------- -------
$ (931) $ 3,541 $(5,592)
======= ======= =======
</TABLE>
A reconciliation of the expected income tax expense at the statutory federal
rate to the Company's actual income tax (benefit) provision is as follows:
<TABLE>
<CAPTION>
February 28, February 28, February 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statutory (benefit) expense....... $(380) $4,212 $ 1,893
State (benefit) expense net of
federal benefit.................. (138) 327 203
Reduction in valuation allowance.. -- (671) (7,299)
Nondeductible items............... (347) (327) (375)
Other, net........................ (66) -- (14)
----- ------ -------
$(931) $3,541 $(5,592)
===== ====== =======
</TABLE>
32
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
7. Income Taxes--(Continued)
The Company's effective income tax rate for the years ended February 28,
1999, 1998 and 1997 differed from the statutory rate principally as a result
of the amortization of the acquired net assets over cost (negative goodwill
amortization) not being in taxable income, and in 1998 and 1997 as a result of
the reduction of the deferred tax asset valuation allowance due to
management's belief that recognition of the related deferred tax assets is
more likely than not. The reduction in the valuation allowance for the years
ended February 28, 1998 and 1997 was $671,000 and $7.3 million, respectively.
The Company paid approximately $1.4 million, $3.0 million and $1.4 million
for federal and state income taxes during the years ended February 28, 1999,
February 28, 1998 and February 28, 1997, respectively.
8. Commitments and Contingencies
Operating Leases
The Company leases office and warehouse facilities and equipment under
operating leases. Rental expense for the years ended February 28, 1999,
February 28, 1998 and February 28, 1997 approximated $16.2, $13.0 and $10.2
million, respectively. Future minimum lease commitments under these agreements
as of February 28, 1999 are as follows: 2000--$14.7 million; 2001--$11.1
million; 2002--$8.2 million; 2003--$5.5 million; 2004--$2.9 million and $1.7
thereafter.
Legal Proceedings
The Company is involved in claims and legal proceedings which have arisen in
the ordinary course of business. The Company intends to defend vigorously all
such claims and does not believe any such matters 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. Employee
contributions under plan provisions are discretionary. Pameco contributed
$330,000, $272,000 and $97,000 to the plan for the years ended February 28,
1999, February 28, 1998 and February 29, 1997, respectively.
On February 28, 1997, Pameco declared and accrued a cash bonus to certain
executives of approximately $2.2 million for prior services. Payment of such
bonus will occur over a three-year period ending February 29, 2000.
33
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
10. Earnings Per Share
The following table sets forth the computation of basic and diluted (loss)
earnings per share (in thousands, except per share amounts).
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------
February 28, 1999 February 28, 1998 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Numerator:
Net (loss) income....... $ (188) $8,846 $11,156
Redeemable preferred
stock dividends........ -- -- (424)
------ ------ -------
Net (loss) income
applicable to common
shareholders........... (188) 8,846 10,732
====== ====== =======
Denominator:
Basic weighted average
shares outstanding..... 8,802 7,779 5,910
Effect of dilutive
securities:
Employee Stock
Options............... -- 404 351
------ ------ -------
Dilutive weighted
average shares
outstanding............ 8,802 8,183 6,261
====== ====== =======
Basic (loss) earnings
per share.............. $(0.02) $ 1.14 $ 1.82
====== ====== =======
Diluted (loss) earnings
per share.............. $(0.02) $ 1.08 $ 1.71
====== ====== =======
</TABLE>
The computation of dilutive potential common shares for the fiscal years ended
February 28, 1999 and February 28, 1998 excludes 547,250 and 49,750,
respectively, of stock options that are antidilutive based on the average
market price for that period.
11. Restructuring
In February 1999, management approved a restructuring plan involving the
closure of certain branches and downsizing of distribution centers in certain
markets (the "Restructuring Plan"). In accordance with the Restructuring Plan,
such branches and distribution centers are scheduled to be closed or downsized
in 1999. The Company also terminated its dedicated fleet contract. The Company
has recognized a charge of approximately $4.0 million (approximately $2.5
million after income taxes or $0.28 per diluted share) to establish reserves
for the future cash expenditures related to these charges. The established
reserves are primarily for future lease payments for all locations to be
downsized or abandoned payable in accordance with the terms of the lease
agreements and for certain lease-related costs. Disbursements are estimated to
occur as follows:
<TABLE>
<CAPTION>
Year ending
February 28 or 29,
------------------
<S> <C>
2000...................................... $1,800
2001...................................... 1,400
2002...................................... 675
2003...................................... 150
------
Total.................................. $4,025
======
</TABLE>
34
<PAGE>
PAMECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 28, 1999
12. Quarterly Financial Data (unaudited)
The following is a summary of the unaudited quarterly results of operations
for the fiscal years ended February 28, 1999 and February 28, 1998 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year ended February 28, 1999
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................ $145,194 $210,293 $148,068 $121,487
Gross profit............................. $ 34,048 $ 50,483 $ 35,493 $ 26,925
Net income (loss)........................ $ 1,884 $ 8,308 $ 102 $(10,482)
Basic income (loss) per share............ $ 0.22 $ 0.95 $ 0.01 $ (1.18)
Basic weighted average shares
outstanding............................. 8,740 8,782 8,818 8,867
Diluted income (loss) per share.......... $ 0.21 $ 0.91 $ 0.01 $ (1.18)
Diluted weighted average shares
outstanding............................. 9,120 9,180 9,106 8,867
<CAPTION>
Year ended February 28, 1998
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................ $113,735 $146,460 $117,197 $106,618
Gross profit............................. $ 26,611 $ 34,382 $ 27,574 $ 26,758
Net income............................... $ 1,015 $ 5,974 $ 1,199 $ 658
Basic income per share................... $ 0.19 $ 0.70 $ 0.14 $ 0.08
Basic weighted average shares
outstanding............................. 5,229 8,528 8,697 8,706
Diluted income per share................. $ 0.18 $ 0.67 $ 0.13 $ 0.07
Diluted weighted average shares
outstanding............................. 5,643 8,970 9,099 9,092
</TABLE>
Fourth quarter net income is unusually low due to severance costs associated
with several executive level separations, product discontinuance, and a
restructuring of the Company's distribution system which resulted in a fourth
quarter charge aggregating approximately $8.1 million.
In February 1999, the Company announced an operations restructuring plan
which encompassed three primary elements: (a) downsizing distribution centers
and relocating certain branches to increase capacity, (b) certain branch
closings and (c) terminating its dedicated fleet contract. This plan resulted
in a fourth quarter charge of approximately $4.0 million. Such amount is
reflected in the 1999 consolidated statement of operations as restructuring.
In the fourth quarter of 1999, three executive level employees were
separated and the Company provided severance packages resulting in an
aggregate charge of approximately $1.5 million. Such amount is reflected in
the 1999 consolidated statement of operations as severance.
In the fourth quarter of 1999, the Company elected to discontinue relations
with certain suppliers and recorded a charge of approximately $2.6 million to
adjust such inventory to net realizable value. Such charge is included in cost
of products sold in the 1999 consolidated statement of operations.
35
<PAGE>
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the headings "Directors and Executive
Officers" and Section "16(a) Beneficial Ownership Reporting Compliance" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 1999 Annual Meeting of Shareholders, to be filed
with the Commission, is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 1999 Annual Meeting of Shareholders, to be filed
with the Commission, is incorporated herein by reference. In no event shall
the information contained in the Proxy Statement under the heading "Comparison
of Cumulative Total Return" be deemed incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Share Ownership of Management
and Certain Beneficial Owners" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Company's 1999 Annual
Meeting of Shareholders, to be filed with the Commission, is incorporated
herein by reference. For purposes of determining the aggregate market value of
the Company's voting stock held by nonaffiliates, shares held by all directors
and executive officers of the Company have been excluded. The exclusion of
such shares is not intended to, and shall not, constitute a determination as
to which persons or entities may be "affiliates" of the Company as defined by
the Commission.
Item 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Company's 1999 Annual
Meeting of Shareholders, to be filed with the Commission, is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)Financial Statements, Financial Statement Schedule and Exhibits
(1) Financial Statements included in Item 8:
Consolidated Balance Sheets as of February 28, 1999 and 1998
Consolidated Statements of Operations for the years ended February 28,
1999, February 28, 1998, and February 28, 1997
Consolidated Statements of Shareholders' Equity for the years ended
February 28, 1999, February 28, 1998, and February 28, 1997
36
<PAGE>
Consolidated Statements of Cash Flows for the years ended February 28,
1999, February 28, 1998, and February 28, 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
(2) Financial Statement Schedule
Schedule II. Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits:
10.14F Fourth Amendment and Waiver to Amended and Restated Credit
Agreement dated June 11, 1999
10.19C Amendment No. 5 to Securitization Agreement dated June 11, 1999
10.28 Lender Warrants
23. 1 Consent of Ernst and Young LLP
(b)Reports on Form 8-K:
On February 23, 1999, the Company filed a Form 8-K with the Commission to
report its preliminary fiscal fourth quarter and year-end outlook.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities indicated, this 14th day of June, 1999.
/s/ James R. Balkcom, Jr. Chairman
- ------------------------------------- Principal Executive Officer
James R. Balkcom, Jr. Principal Financial Officer
Principal Accounting Officer
/s/ Richard A. Bearse Director
- -------------------------------------
Richard A. Bearse
/s/ G. Thomas Braswell Director
- -------------------------------------
G. Thomas Braswell
/s/ Michael H. Bulkin Director
- -------------------------------------
Michael H. Bulkin
/s/ Earl Dolive Director
- -------------------------------------
Earl Dolive
/s/ Philip M. Pfeffer Director
- -------------------------------------
Philip M. Pfeffer
/s/ H. Whitney Wagner Director
- -------------------------------------
H. Whitney Wagner
/s/ Thomas G. Weld Director
- -------------------------------------
Thomas G. Weld
38
<PAGE>
Schedule II. Valuation and Qualifying Accounts
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
---------------------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts-- Deductions at End
of Year Expenses Describe Describe of Year
---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for losses on
trade accounts (a):
Year ended February 28,
1999.................. $3,992 $3,727 $ 949(b) $2,458(c) $ 6,210
Year ended February 28,
1998.................. 2,535 1,854 850(b) 1,247(c) 3,992
Year ended February 28,
1997.................. 1,878 1,065 -- 408(c) 2,535
Valuation allowance for
inventory (a):
Year ended February 28,
1999.................. $4,779 $5,296 $2,209(d) $1,903(e) $10,381
Year ended February 28,
1998.................. 4,192 1,277 1,297(d) 1,987(e) 4,779
Year ended February 28,
1997.................. 2,957 767 1,795(d) 1,327(e) 4,192
Valuation allowance for
deferred tax
assets (a):
Year ended February 28,
1999.................. $1,140 $ -- $ -- $ -- $ 1,140
Year ended February 28,
1998.................. 1,811 -- -- 671(g) 1,140
Year ended February 28,
1997.................. 8,556 -- 554(f) 7,299(g) 1,811
</TABLE>
- --------
(a) Deducted from the related asset accounts.
(b) Principally represents recoveries of amounts previously charged off and
allowances for losses on trade accounts of acquired companies at the date
of acquisition.
(c) Charge off of uncollected accounts (net of recoveries).
(d) Inventory reserves of acquired companies at the date of acquisition.
(e) Adjustments relating to book to physical and other inventory adjustments.
(f) Valuation allowance for deferred income tax assets of acquired companies at
the date of acquisition.
(g) Reduction in valuation allowance due to management belief that recognition
of the related deferred income tax assets is more likely than not.
39
<PAGE>
EXHIBIT 10.14F
FOURTH AMENDMENT AND WAIVER
---------------------------
FOURTH AMENDMENT AND WAIVER (this "Amendment"), dated as of June 15,
---------
1999, to the Amended and Restated Credit Agreement, dated as of March 10, 1998
(as previously amended, and as the same is being and may be further amended,
restated, supplemented or otherwise modified from time to time, the "Credit
------
Agreement"), among PAMECO CORPORATION, a Georgia corporation (the "Company"),
- --------- -------
the lenders parties thereto (together with their respective successors and
permitted assigns, the "Lenders") and GENERAL ELECTRIC CAPITAL CORPORATION, a
-------
New York corporation, as agent for the Lenders (in such capacity, together with
its successors and permitted assigns, the "Agent").
-----
W I T N E S S E T H :
-------------------
WHEREAS, the Company has requested that the Agent and the Lenders
amend certain provisions of, and grant a certain waiver with respect to, the
Credit Agreement upon the terms and subject to the conditions set forth herein;
and
WHEREAS, the Agent and the Lenders have agreed to such amendments and
waiver only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto hereby agree as follows:
1. Defined Terms. Terms defined in the Credit Agreement are used
-------------
herein with the meanings set forth in the Credit Agreement unless otherwise
defined herein.
2. Amendment of Credit Agreement.
-----------------------------
(a) Amendment of Section 1.1.
------------------------
(i) The following text is hereby inserted into the definition
of Consolidated EBITDA contained in Section 1.1 of the Credit
Agreement immediately after clause (e) of such definition:
"plus (f) for the fiscal months ending February 28, 1999
----
through January 31, 2000, the amount set forth opposite
"Total FY 1999 Income Statement Charges" listed on Annex A
attached to Schedule 10.8 hereto"
(ii) The definitions of the following defined terms are deleted
in their respective entireties and inserted in lieu thereof the
following new definitions:
""Borrowing Base" shall mean, at any date, the amount equal
--------------
to the
<PAGE>
lesser of (a) $90,000,000 and (b) 50% of Eligible
Inventory, less Tranche A Term Loan Reserves in effect from
----
time to time; provided, however, that in no event shall the
-------- -------
sum of the Revolving Credit Loans, the Swingline Loans and
the Reimbursement Obligations (without duplication of the
Reimbursement Obligations deemed to have become Loans)
exceed the Borrowing Base. The Agent, at any and all times,
shall be entitled to change any and all of the percentages
used in determining the Borrowing Base at any time in its
reasonable discretion with the consent of the Majority
Facility Lenders.
"Tranche A Term Loan Maturity Date" shall mean September 30,
---------------------------------
2001.
"Tranche B Term Loan Maturity Date" shall mean June 30,
---------------------------------
2001.
"Loan Documents" shall mean this Agreement, the Notes, the
--------------
Syndication Letter Agreement, the Intercreditor Agreement,
the Global Amendment, the Warrants and the Collateral
Documents.
"Obligations" shall mean the unpaid principal amount of, and
-----------
interest on, the Loans and all other obligations,
indebtedness and liabilities (including, without
limitation, Reimbursement Obligations) of the Company to the
Agent and the Lenders (including the Lenders and/or any
Affiliates of the Lenders in their individual capacities as
a holder of a Warrant), whether direct or indirect, absolute
or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in
connection with this Agreement or the other Loan Documents
and any other document executed and delivered in connection
therewith or herewith, whether on account of principal,
interest, fees, indemnities, costs, expenses (including,
without limitation, all fees and disbursements of counsel to
the Agent) or otherwise. "Obligations" shall include,
without limitation, interest accruing after the maturity of
the Loans or Reimbursement Obligations and interest accruing
after the filing of any petition in bankruptcy or the
commencement of any insolvency, reorganization or like
proceeding relating to the Company, whether or not a claim
for post-filing or post-petition interest is allowed in such
proceeding; provided however, in no event shall the
Obligations with respect to any Warrant be secured by any
Lien granted in favor of the Agent or the Lenders."
"Required Lenders" shall mean the Majority Facility
----------------
Lenders."
(iii) The following new definitions shall be inserted in
alphabetical order:
2
<PAGE>
""Fixed Charge Coverage Ratio" shall mean the ratio
---------------------------
described in paragraph (b) of Schedule 10.8 to the Credit
-------------
Agreement."
"Permitted Subordinated Debt" shall mean Indebtedness of the
---------------------------
Company in an amount not to exceed $30,000,000, is otherwise
subordinated to the Obligations in a manner and form
satisfactory to the Lenders in their sole discretion, as to
right and time of payment and as to any rights and remedies
thereunder."
"Tranche A Term Loan Reserves" shall mean, for the fiscal
----------------------------
month ended July 1999, $3,000,000 and, thereafter, shall be
equal to the aggregate amount outstanding under the Tranche
A Term Loan.
"Warrants" shall mean those certain detachable warrant
--------
agreements dated the Fourth Amendment Effective Date in
favor of each Tranche B Term Loan Lender."
(b) Amendment of Section 2.4. Section 2.4 of the Credit Agreement is
------------------------
hereby amended by:
(i) deleting paragraph (a) thereof in its entirety and inserting
in lieu thereof the following:
"(a) The Tranche A Term Loan of each Tranche A Term Loan Lender shall
mature, and the Company unconditionally promises to pay such Tranche A
Term Loan to the Agent for the account of such Tranche A Term Loan
Lender, in 11 consecutive installments, commencing on the Fourth
Amendment Effective Date, each of which shall be in an amount equal to
such Lender's Tranche A Term Loan Percentage multiplied by the amount
set forth below opposite such installment:
Installment Principal Amount
----------- ----------------
Fourth Amendment Effective Date 15,000,000
June 30, 1999 750,000
September 30, 1999 750,000
December 31, 1999 750,000
March 31, 2000 750,000
June 30, 2000 750,000
September 30, 2000 750,000
December 31, 2000 1,250,000
March 31, 2001 1,250,000
June 30, 2001 1,250,000
Tranche A Term Loan
Maturity Date 250,000"
3
<PAGE>
(ii) deleting paragraph (b) thereof in its entirety and inserting
in lieu thereof the following:
"(b) The Tranche B Term Loan of each Tranche B Term Loan Lender shall
mature, and the Company unconditionally promises to pay such Tranche B
Term Loan to the Agent for the account of such Tranche B Term Loan
Lender, in 9 consecutive quarterly installments, commencing on the
Fourth Amendment Effective Date, each of which shall be in an amount
equal to such Lender's Tranche B Term Loan Percentage multiplied by
the amount set forth below opposite such installment:
Installment Principal Amount
----------- ----------------
June 30, 1999 62,500
September 30, 1999 62,500
December 31, 1999 62,500
March 31, 2000 62,500
June 30, 2000 62,500
September 30, 2000 62,500
December 31, 2000 62,500
March 31, 2001 62,500
Tranche B Term Loan
Maturity Date 24,375,000"
(c) Amendment of Section 6.3. The following text is hereby inserted
------------------------
into Section 6.3 to the Credit Agreement as the final text thereof:
"(g) Until, on a rolling four-quarter basis, the Consolidated Senior
Debt Leverage Ratio is less than or equal to 5.0, the Tranche B Term Loan shall
accrue interest (payable on the earlier of (i) the payment in full of Tranche B
Term Loan and (ii) the refinancing in full of Tranche B Term Loan) which will
compound monthly against the accreted principal balance of the Tranche B Term
Loan (i.e. the original principal balance of Tranche B Term Loan increased
periodically by such accrued interest) at the following rates during the
following periods:
Period Accrued Rate
from the Fourth
Amendment Effective
Date through and
including June 30, 1999 2.00% per annum
from July 1, 1999
through and including
July 31, 1999 3.00% per annum
4
<PAGE>
from August 1, 1999
through and including
August 31, 1999 4.00% per annum
from September 1, 1999
through and including
February 29, 2000 5.00% per annum
March 1, 2000 until
payment or the Tranche
B Term Loan Maturity
Date 10.00% per annum"
(d) Amendment of Section 6.12. Section 6.12(d) to the Credit
-------------------------
Agreement is hereby amended by deleting it in its entirety and substituting
in lieu thereof the following:
"(d) Each prepayment of Term Loan Facilities shall be applied
first, to the Tranche A Term Loan until the same shall have been repaid in full
- -----
and thereafter, to the Tranche B Term Loan."
(e) Amendment of Section 9.1. Subsection 9.1(c) to the Credit
------------------------
Agreement is hereby amended by deleting it in its entirety and substituting
in lieu thereof the following:
"(c) as soon as available, but in any event within 30 days after the
end of each month (other than May, August, November and February (except
with respect to fiscal month ended February 29, 2000) (i) copies of the
unaudited consolidated balance sheet of the Company and its Consolidated
Subsidiaries, in each case as at the end of such month, and the related
unaudited consolidated statement of earnings and cash flows for such month
and the portion of the calendar year through such month, certified by the
chief financial officer of the Company as presenting fairly the financial
condition and results of operations of the Company and its Consolidated
Subsidiaries (subject to normal year-end and quarterly audit adjustments)
and (ii) copies of the unaudited consolidating financial statements of the
Company and its Consolidated Subsidiaries including therein (A) the
consolidating balance sheets of each of the Company and its Consolidated
Subsidiaries, as at the end of such month and (B) the related consolidating
statements of earnings for such month and the portion of the calendar year
through such month, and in each case showing inter-company eliminations;"
(f) Amendment of Section 9.2. Subsection 9.2(a) to the Credit
------------------------
Agreement is hereby amended by deleting it in its entirety and substituting
in lieu thereof the following:
"(a) concurrently with the delivery of each set of the financial
statements referred to in subsections 9.1(a) and 9.1(b) and, for the
fiscal year ended February 29, 2000 only, subsection 9.1(c), a
certificate of the chief financial officer of the Company (i) stating
that, to the best of such officer's knowledge, during the period
covered by
5
<PAGE>
such set of financial statements, each Loan Party has observed or
performed all of its covenants and other agreements, and satisfied
every condition, contained in the Loan Documents to be observed,
performed or satisfied by it, and that such officer has obtained no
knowledge of any Default or Event of Default (except as specified in
such certificate, in which case such certificate shall set forth in
reasonable detail the steps that the Company plans to take in respect
thereof), (ii) showing in reasonable detail the calculations
supporting such statement in respect of subsection 10.8 and (iii)
certifying that such consolidating financial statements are fairly
stated in all material respects when considered in relation to the
consolidated financial statements of the Company and its Consolidated
Subsidiaries (subject to normal year-end audit adjustments and
quarterly adjustments);"
(g) Amendment of Section 10.1. Section 10.1 to the Credit Agreement
-------------------------
is hereby amended by deleting clauses (c) and (d) of Section 10.1 in their
entirety and substituting in lieu thereof the following:
"(c) Indebtedness of the Company and its Subsidiaries to each other
to the extent permitted by subsection 10.5(e);
(d) Indebtedness not otherwise described in clauses (a) through (c)
above not to exceed $250,000 in principal amount in the aggregate at
any time outstanding; and
(e) Permitted Subordinated Debt; provided the net proceeds thereof are
--------
applied first, to interest due and payable (including interest in
-----
accordance with Section 6.3(g)) on the Tranche B Term Loan, second, to
------
scheduled installements of the Tranche B Term Loan until such Loan
shall have been prepaid in full, third, to interest due and payable on
-----
the Tranche A Term Loan, fourth, to scheduled installments of the
------
Tranche A Term Loan, until such Loan shall have been prepaid in full,
and thereafter in accordance with subsection 6.1(a)."
(h) Amendment of Section 10.5. Section 10.5 to the Credit Agreement
-------------------------
is hereby amended by deleting clauses (e) and (f) of Section 10.5 in their
entirety and substituting in lieu thereof the following:
"(e) loans, advances, extensions of credit, capital contributions and
investments by the Company to or in its Wholly Owned Subsidiaries in an
aggregate among not to exceed $50,000 made in the ordinary course of business
and loans, advances, extensions of credit, capital contributions and investments
by Subsidiaries of the Company in the Company."
(i) Amendment of Section 13.1. The following text is hereby
-------------------------
inserted into Section 13.1 to the Credit Agreement as the final text
thereof:
"Notwithstanding anything contained in this subsection 13.1 to
the contrary, no amendment or supplement to, waiver of any provision of any
Warrant, nor consent to any departure by any Loan Party therefrom, shall in
any event be effective unless the same shall
6
<PAGE>
be in writing and signed by the Company, all of the Lenders and all
Purchasing Institutions affected thereby; and then such amendment,
supplement, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given."
(j) Amendment of Section 13.3. The name and address appearing
-------------------------
opposite the second reference to "with a copy to:" contained in Section
13.3 of the Credit Agreement is hereby replaced with the following text:
"Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Telecopy: (312) 558-5700
Attn: M. David Galainena /
Ronald H. Jacobson"
(k) Amendment of Schedule 10.8. Schedule 10.8 to the Credit
--------------------------
Agreement is hereby replaced with Annex A attached hereto.
-------
(l) Amendment of Annex A. The following text is hereby inserted
--------------------
into Annex A to the Credit Agreement as the final text thereof:
"Further notwithstanding the foregoing, for the period from the Fourth
Amendment Effective Date to and until the date (based on quarterly
financial data) on which, for the preceding twelve (12) consecutive
fiscal months, (a) Consolidated EBITDA is not less than $20,000,000,
(b) the Fixed Charge Coverage Ratio is not less than 1.25 to 1.00, (c)
the Consolidated Senior Debt Leverage Ratio is not greater than 5.00
to 1.00, and (d) the Consolidated Total Debt Leverage is not greater
than 6.00 to 1.00, the Applicable Margins and Unused Commitment Fee
Rate will be as follows:
Applicable Margin for Revolving Credit Loans:
Index Rate Loans 0.75%
Eurodollar Loans 2.50%
Applicable Margin for Tranche A Term Loan:
Index Rate Loans 1.25%
Eurodollar Loans 3.00%
Applicable Margin for Tranche B Term Loan:
Index Rate Loans 2.75%
Eurodollar Loans 4.50%
Unused Commitment Fee Rate 0.25%"
(m) New Tranche B Term Notes. On the Fourth Amendment Effective
------------------------
Date, the Company shall execute and deliver to each Tranche B Term Loan
Lender, in substitution and exchange for, but not in payment of the Tranche
B Term Note held by such Lender, a promissory note (each, a "New Tranche B
Term Note") substantially in the form of Exhibit A-2 attached hereto, with
appropriate insertions therein as to payee and date,
7
<PAGE>
payable to the order of such Lender and in a principal amount equal to such
Lender's Tranche B Term Loan Percentage of the Tranche B Term Loan
Commitments with effect of such New Tranche B Term Note to amend and
restate and be deemed to be the "Tranche B Term Note" under the Credit
Agreement.
3. Waiver. The Agent and the Lenders hereby waive the Event of
------
Default arising under Sections 11(c) and (e) of the Credit Agreement caused
solely by the Company's failure to comply with subsections (a), (b), (e) and (f)
of Schedule 10.8, Sections 9.1, 9.2 and 9.8(a) to the Credit Agreement for the
fiscal quarter ended February 28, 1999. The Agent and the Lenders hereby waive
the Company's compliance with Section 6.1(b) of the Credit Agreement solely for
the fiscal year ended February 28, 1999. The foregoing waivers are limited to
the specific purpose for which they are granted and shall not be construed as a
consent, waiver or other modification with respect to any other term, condition
or other provisions of any Loan Document or any other Default or Event of
Default now or hereafter existing.
4. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective (the actual date of such effectiveness, the "Fourth Amendment
----------------
Effective Date") as of the date first above written when:
- --------------
(a) This Amendment shall have been duly executed and delivered by
each of the parties hereto.
(b) The Acknowledgment and Consent dated as of the date hereof by
the Company and Pameco Investment Company, Inc. shall have been duly
executed and delivered by each of the parties thereto.
(c) The Agent shall have received a certificate of the Secretary
or an Assistant Secretary of each Loan Party, dated as of the Fourth
Amendment Effective Date, and certifying (i) that attached thereto is a
true and complete copy of the resolutions (which resolutions are in form
and substance reasonably satisfactory to each Lender) of the board of
directors of such Loan Party authorizing, as applicable, the execution,
delivery and performance of this Amendment, the Acknowledgment and Consent
attached hereto, the Fourth Amendment Fee Letter (as defined below) and
related matters, certified by the Secretary or an Assistant Secretary of
such Loan Party as of the Fourth Amendment Effective Date and (ii) as to
the incumbency and specimen signature of such Loan Party's officers
executing this Amendment and all other documents required or necessary to
be delivered hereunder or in connection herewith. Such certificate shall
state that the resolutions thereby certified have not been amended,
modified, revoked or rescinded as of the date of such certificate.
(d) The Agent shall have received true and complete copies of the
certificate of incorporation and by-laws of each Loan Party, certified as
of the Fourth Amendment Effective Date as complete and correct copies
thereof by the Secretary or an Assistant Secretary of such Loan Party.
8
<PAGE>
(e) The Agent shall have received fees as required in the Fee
Letter dated as of the date hereof from GE Capital to the Company (the
"Fourth Amendment Fee Letter").
----------------------------
(f) Each Lender shall have received a duly executed original
Warrant.
(g) Each Lender shall have received a duly executed original
Tranche B Term Note.
(h) The Agent shall have received an executed legal opinion from
Kilpatrick Stockton LLP in form and substance satisfactory to the Agent.
5. Company Representations and Warranties. The Company represents
--------------------------------------
and warrants that:
(a) Each of this Amendment and the Credit Agreement as amended by
this Amendment constitutes the legal, valid and binding obligation of the
Company.
(b) Each of the representations and warranties set forth in
Section 7 of the Credit Agreement are true and correct as of the Fourth
Amendment Effective Date; provided that references in the Credit Agreement
to this "Agreement" shall be deemed references to the Credit Agreement as
amended to date and by this Amendment.
(c) After giving effect to this Amendment, there does not exist
any Default or Event of Default.
6. Continuing Effect. Except as expressly waived hereby, the Credit
-----------------
Agreement shall continue to be and shall remain in full force and effect in
accordance with its terms.
7. Expenses. The Company agrees to pay and reimburse the Agent for
--------
all of its out-of-pocket costs and expenses incurred in connection with the
negotiation, preparation, execution, and delivery of this Amendment, including
the fees and expenses of counsel to the Agent.
8. Counterparts. This Amendment may be executed on any number of
------------
separate counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. Delivery of an executed
counterpart of a signature page to this Amendment by telecopy shall be effective
as delivery of a manually executed counterpart of this Amendment.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
-------------
AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK.
[signature page follows]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment and Waiver to be duly executed and delivered in New York, New York by
their proper and duly authorized officers as of the day and year first above
written.
PAMECO CORPORATION
By: ________________________
Title: ______________________
GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and
as a Lender
By: ________________________
Title: Duly Authorized Signatory
WACHOVIA BANK, N.A.
By: ________________________
Title: ______________________
NATIONSBANK, N.A.
By: ________________________
Title: ______________________
SUNTRUST BANK, ATLANTA
By: ________________________
Title: ______________________
By: ________________________
Title: ______________________
<PAGE>
ANNEX A
-------
SCHEDULE 10.8
to
Credit Agreement
FINANCIAL COVENANTS
-------------------
The Company shall not breach or fail to comply with any of the
following financial covenants, each of which shall be calculated in accordance
with GAAP, consistently applied:
(a) Company EBITDA. As of the last day of each fiscal period of the
--------------
Company, the Consolidated EBITDA for the preceding twelve consecutive fiscal
months shall not be less than the amount set forth below opposite such period:
Fiscal Quarter Ending Amount
--------------------- ------
May 31, 1999 $20,012,000
August 31, 1999 $18,524,000
November 30, 1999 $18,976,000
February 29, 2000 $17,272,000
For each fiscal quarter thereafter $20,000,000
Fiscal Month Ending Amount
------------------- ------
June 30, 1999 $19,033,000
July 31, 1999 $18,382,000
September 30, 1999 $18,190,000
October 31, 1999 $18,115,000
December 31, 1999 $17,905,000
January 31, 2000 $18,190,000
(b) Fixed Charge Coverage Ratio. As of the last day of each fiscal
---------------------------
quarter of the Company, the ratio of (i) Consolidated EBITDA to (ii)
Consolidated Fixed Charges for the preceding twelve consecutive fiscal months
(the "Fixed Charge Coverage Ratio") shall not be less than the ratio set forth
---------------------------
below opposite such period:
Fiscal Quarter Ending Ratio
--------------------- -----
May 31, 1999 1.43 to 1.00
August 31, 1999 1.20 to 1.00
November 30, 1999 1.07 to 1.00
February 29, 2000 0.85 to 1.00
For each fiscal quarter thereafter 1.25 to 1.00
<PAGE>
(c) Maintenance of Net Worth. (i) The Company Net Worth on the last
------------------------
day of each fiscal quarter ending on the day set forth below shall not be less
than the amount set forth opposite such date:
Fiscal Year Ending Amount
------------------ ------
May 31, 1998 $65,000,000
August 31, 1998 $65,000,000
November 30, 1998 $65,000,000
February 28, 1999 $65,000,000 plus 50% of
----
Consolidated Net Income for the
fiscal year then ended
(ii) Commencing with the fiscal year of the Company ending on February
29, 2000, (A) the Company Net Worth on the last day of each of the first, second
and third fiscal quarters of each fiscal year of the Company shall not be less
than the minimum Company Net Worth of the Company required pursuant to this
paragraph (c) for the fourth quarter of the immediately preceding fiscal year of
the Company and (B) the Company Net Worth on the last day of each fiscal year of
the Company shall not be less than the minimum Company Net Worth required
pursuant to this paragraph (c) for the third quarter of such fiscal year plus
----
50% of Consolidated Net Income for such fiscal year.
(d) Consolidated Senior Debt Leverage Ratio. As of the last day of
---------------------------------------
any fiscal period of the Company, the Consolidated Senior Debt Leverage Ratio
shall not be greater than the ratio set forth below opposite such period:
Fiscal Quarter Ending Ratio
--------------------- -----
May 31, 1999 7.43 to 1.00
August 31, 1999 8.61 to 1.00
November 30, 1999 8.58 to 1.00
February 29, 2000 10.52 to 1.00
For each fiscal quarter thereafter 5.00 to 1.00
Fiscal Month Ending Ratio
------------------- -----
June 30, 1999 8.00 to 1.00
July 31, 1999 8.53 to 1.00
September 30, 1999 8.97 to 1.00
October 31, 1999 8.95 to 1.00
December 31, 1999 9.34 to 1.00
January 31, 2000 9.16 to 1.00
2
<PAGE>
(e) Consolidated Total Debt Leverage Ratio. As of the last day of any
--------------------------------------
fiscal quarter of the Company, the Consolidated Total Debt Leverage Ratio shall
not be greater than the ratio set forth below opposite such period:
Fiscal Quarter Ending Ratio
--------------------- -----
May 31, 1999 7.48 to 1.00
August 31, 1999 8.62 to 1.00
November 30, 1999 8.63 to 1.00
February 29, 2000 10.53 to 1.00
For each fiscal quarter thereafter 6.00 to 1.00
<PAGE>
EXHIBIT 10.19C
AMENDMENT NO. 5
TO SECURITIZATION AGREEMENTS
AMENDMENT NO. 5, dated as of June 15, 1999, among PAMECO
SECURITIZATION CORPORATION, a Delaware company ("PSC"), PAMECO CORPORATION, a
---
Georgia company ("Pameco"), REDWOOD RECEIVABLES CORPORATION ("Redwood") and
------ -------
GENERAL ELECTRIC CAPITAL CORPORATION, a New York company ("GECC").
----
WHEREAS, Pameco, as originator (in such capacity, the "Originator")
----------
and PSC are parties to a Receivables Transfer Agreement, dated as of April 29,
1996 (as heretofore amended, supplemented or otherwise modified, the "Transfer
--------
Agreement");
- ---------
WHEREAS, PSC, as seller (in such capacity, the "Seller"), Redwood, as
------
purchaser (in such capacity, the "Purchaser"), GECC, as operating agent (in such
---------
capacity, the "Operating Agent") and collateral agent (in such capacity, the
---------------
"Collateral Agent") and Pameco, as servicer (in such capacity, the "Servicer")
- ----------------- --------
are parties to a Receivables Purchase and Servicing Agreement, dated as of April
29, 1996 (as heretofore amended, supplemented or otherwise modified, the
"Purchase Agreement");
- -------------------
WHEREAS, Redwood and GECC are parties to a Liquidity Loan Agreement,
dated as of April 29, 1996 (as heretofore amended, supplemented or otherwise
modified, the "Liquidity Agreement"; together with the Transfer Agreement and
-------------------
the Purchase Agreement, the "Securitization Agreements"); and
-------------------------
WHEREAS, the parties hereto desire to amend the Securitization
Agreements and certain ancillary documents and agreements referred to therein in
the manner set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. All capitalized terms used herein, unless
-----------
otherwise defined, are used as defined in the Purchase Agreement.
ARTICLE II
AMENDMENTS TO PURCHASE AGREEMENT AND ANNEX X
SECTION 2.1 Amendment to Exhibit H. Exhibit H to the Purchase
----------------------
Agreement is hereby amended by:
<PAGE>
(a) deleting subsection 1(a) in its entirety and replacing it with the
following:
"(a) Servicer EBITDA. As of the last day of each fiscal quarter of
---------------
the Servicer, the Consolidated EBITDA for the preceding twelve consecutive
fiscal months shall not be less than the amount set forth below opposite
such period:
Fiscal Quarter Ending Amount
--------------------- ------------
May 31, 1999 $20,012,000
August 31, 1999 $18,524,000
November 30, 1999 $18,976,000
February 29, 2000 $17,272,000
For each fiscal quarter thereafter $20,000,000"
(b) deleting subsection 1(c) in its entirety and replacing it with the
following:
"(c) Fixed Charge Coverage Ratio. As of the last day of each
---------------------------
fiscal quarter of the Servicer, the ratio of (i) Consolidated EBITDA to
(ii) Consolidated Fixed Charges for the preceding twelve consecutive fiscal
months shall not be less than the ratio set forth below opposite such
period:
Fiscal Quarter Ending Ratio
--------------------- ------------
May 31, 1999 1.43 to 1.00
August 31, 1999 1.20 to 1.00
November 30, 1999 1.07 to 1.00
February 29, 2000 0.85 to 1.00
For each fiscal quarter thereafter 1.25 to 1.00"
(c) deleting subsection 1(d) in its entirety and replacing it with the
following:
2
<PAGE>
"(d) Maintenance of Net Worth. (i) The Company Net Worth on the
------------------------
last day of each fiscal quarter ending on the day set forth below shall not
be less than the amount set forth opposite such date:
<TABLE>
<CAPTION>
Fiscal Year Ending Amount
--------------------------------------- -------------------------------
<S> <C>
May 31, 1998 (first fiscal quarter) $65,000,000
August 31, 1998 (second fiscal quarter) $65,000,000
November 30, 1998 (third fiscal quarter) $65,000,000
February 28, 1999 (fiscal year) $65,000,000 plus 50% of
----
Consolidated Net Income for the
fiscal year then ended
</TABLE>
(ii) Commencing with the fiscal year of the Servicer ending on
February 29, 2000, (A) the Company Net Worth on the last day of each
of the first, second and third fiscal quarters of each fiscal year of
the Servicer shall not be less than the minimum Company Net Worth of
the Servicer required pursuant to this paragraph (d) for the fourth
quarter of the immediately preceding fiscal year of the Servicer and
(B) the Company Net Worth on the last day of each fiscal year of the
Servicer shall not be less than the minimum Company Net Worth required
pursuant to this paragraph (d) for the third quarter of such fiscal
year plus 50% of Consolidated Net Income for such fiscal year.
----
The terms "Consolidated EBITDA", "Consolidated Fixed Charges", "Company Net
Worth" and "Consolidated Net Income" shall have the meanings ascribed to
such terms in the Credit Agreement."
SECTION 2.2 Amendment to Schedule 3. Schedule 3 to the Purchase
-----------------------
Agreement is amended by deleting therefrom the definitions of the terms "Daily
-----
Margin" and "Daily Default Margin" and by substituting the following new
- ------ --------------------
definitions of such terms in lieu thereof:
""Daily Margin" and "Daily Default Margin" mean the following percentages
------------ --------------------
divided by 360:
<TABLE>
<CAPTION>
Daily Margin Daily Default Margin Interest Coverage Ratio
------------ -------------------- -----------------------
<S> <C> <C>
1.25% 3.25% Less than 1.75
1.00% 3.00% Greater than or equal to 1.75 and less than 3.50
0.75% 2.75% Greater than or equal to 3.50 and less than 5.50
0.625% 2.625% Greater than or equal to 5.50
</TABLE>
3
<PAGE>
The term "Interest Coverage Ratio" shall have the meaning ascribed to such
term in the Credit Agreement.
Notwithstanding the foregoing, for the period from the Amendment Effective
Date to and until the date (based on quarterly financial data) on which,
for the preceding twelve (12) consecutive fiscal months, (a) Consolidated
EBITDA is not less than $20,000,000, (b) the Fixed Charge Coverage Ratio is
not less than 1.25 to 1.00, (c) the Consolidated Senior Debt Leverage Ratio
is not greater than 5.00 to 1.00, and (d) the Consolidated Total Debt
Leverage is not greater than 6.00 to 1.00, the Daily Margin and Daily
Default Margin will be as follows:
Daily Margin Daily Default Margin
------------ --------------------
1.75% 3.75%
The terms "Consolidated Senior Debt Leverage Ratio", "Fixed Charge Coverage
Ratio", "Consolidated Total Debt Leverage Ratio" and "Consolidated EBITDA"
shall have the meanings ascribed to such terms in the Credit Agreement."
SECTION 2.3 Amendment to Annex X. Annex X is hereby amended by:
--------------------
(a) deleting from the definition of "Fee Letter" the date
"October 16, 1998" and substituting therefor the date "June 15, 1999".
ARTICLE III
WAIVER
SECTION 3.1 Waiver. The Operating Agent, Redwood and the Collateral
------
Agent hereby waive the Termination Event and Event of Servicer Termination
arising under Sections 9.01(a)(ii), 9.01(l), 9.02(a) and 9.02(f) of the Purchase
Agreement caused solely by the Company=s failure to comply with Sections
5.02(c), 5.02(d), 5.02(e), 5.02(f), 5.02(h), 7.07, 7.08 and 7.09 to the Purchase
Agreement for the fiscal quarter or year ended February 28, 1999. The foregoing
waivers are limited to the specific purpose for which they are granted and shall
not be construed as a consent, waiver or other modification with respect to any
other term, condition or other provisions of any Related Document or any other
Termination Event and Event of Servicer Termination now or hereafter existing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties of PSC and Pameco. Each
------------------------------------------------
of PSC and Pameco represents and warrants that:
4
<PAGE>
(a) this Amendment No. 5 has been duly authorized, executed and
delivered by each such party which is a signatory thereto;
(b) this Amendment No. 5 constitutes the legal, valid and binding
obligation of each such party which is a signatory thereto; and
(c) each of the representations and warranties of such party set forth
in the Securitization Agreements is true and correct as of the Amendment
Effective Date (as defined below) and on such Amendment Effective Date is also
made with respect to the Insurer; provided, that references in the
-------- ----
Securitization Agreements to the Purchase Agreement and to the Transfer
Agreement, shall be deemed references to the Purchase Agreement as amended by
this Amendment No. 5 and to the Transfer Agreement as amended by this Amendment
No. 5, respectively.
SECTION 4.2 Representations and Warranties of Redwood. Redwood
-----------------------------------------
represents and warrants that:
(a) this Amendment No. 5 has been duly authorized, executed and
delivered by Redwood;
(b) this Amendment No. 5 constitutes the legal, valid and binding
obligation of Redwood; and
(c) each of the representations and warranties of Redwood set forth
in the Securitization Agreements is true and correct as of the Amendment
Effective Date (as defined below); provided, that references in the
-------- ----
Securitization Agreements to the Purchase Agreement and to the Transfer
Agreement, shall be deemed references to the Purchase Agreement as amended by
this Amendment No. 5 and to the Transfer Agreement as amended by this Amendment
No. 5, respectively.
ARTICLE V
CONDITIONS PRECEDENT
SECTION 5.1 Conditions Precedent. This Amendment No. 5 shall
--------------------
become effective (the actual date of such effectiveness, the "Amendment
---------
Effective Date") as of the date first above written subject to satisfaction of
- --------------
the following conditions precedent in form and substance satisfactory to the
Operating Agent:
(a) Counterparts hereof shall have been duly executed and delivered by
the parties hereto;
(b) the Operating Agent, Redwood, the Seller and the Servicer shall
have executed and delivered the Fee Letter;
5
<PAGE>
(c) the Operating Agent shall have received a certificate of the
Secretary or an Assistant Secretary of each of the Seller and the Servicer,
dated as of the Amendment Effective Date, and certifying (i) the names and true
signatures of the officers authorized on its behalf to sign this Amendment No.
5, (ii) a copy of such party's certificate of incorporation and by-laws, and
(iii) a copy of the resolutions of the board of directors of such party
approving this Amendment No. 5 and the related transactions to which it is a
party, all in form and substance satisfactory to the Operating Agent. Such
certificate shall state that the resolutions thereby certified have not been
amended, modified, revoked or rescinded as of the date of such certificate;
(d) the Operating Agent shall have received an Officer's Certificate
from each of the Seller and the Servicer in the forms of Annexes A-1 and A-2
hereto, respectively;
(e) PSC shall have received a certificate of the Secretary or an
Assistant Secretary of the Originator, dated as of the Amendment Effective Date,
and certifying (i) the names and true signatures of the officers authorized on
its behalf to sign this Amendment No. 5, (ii) a copy of the Originator's
certificate of incorporation and by-laws, and (iii) a copy of the resolutions of
the board of directors of the Originator approving this Amendment No. 5 and the
related transactions to which it is a party. Such certificate shall state that
the resolutions thereby certified have not been amended, modified, revoked or
rescinded as of the date of such certificate;
(f) The Operating Agent shall have received an executed legal opinion
from Kilpatrick Stockton LLP in form and substance satisfactory to the Operating
Agent; and
(g) PSC and Pameco shall have taken such other actions and provided
such documentation as the Operating Agent may request.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Counterparts. This Amendment No. 5 may be executed on
------------
any number of separate counterparts and all of said counterparts taken together
shall be deemed to constitute one and the same instrument.
SECTION 6.2 GOVERNING LAW. THIS AMENDMENT NO. 5 SHALL BE GOVERNED
-------------
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK.
SECTION 6.3 Expenses. Pameco agrees to pay and reimburse the
--------
Operating Agent for all of its out-of-pocket costs and expenses incurred in
connection with the negotiation, preparation, execution, and delivery of this
Amendment No. 5, including the reasonable fees and expenses of counsel to the
Operating Agent and the Collateral Agent.
6
<PAGE>
[signature page follows]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
5 to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
PAMECO SECURITIZATION CORPORATION
By ______________________________
Title:
REDWOOD RECEIVABLES CORPORATION
By ______________________________
Title:
PAMECO CORPORATION
By ______________________________
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION, as Operating Agent and
Collateral Agent
By ______________________________
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION, as Liquidity Agent
By _____________________________
Title:
<PAGE>
GENERAL ELECTRIC CAPITAL
CORPORATION, as Letter of Credit Agent and
Letter of Credit Provider
By ______________________________
Title:
<PAGE>
ANNEX A-1
FORM OF OFFICER'S CERTIFICATE OF SELLER
---------------------------------------
Pameco Securitization Corporation
Officer's Certificate
I, [Name of Officer], the duly elected [Insert Title] of Pameco
Securitization Corporation (the "Seller"), hereby certify pursuant to Section
5.1(d) of Amendment No. 5 to Securitization Agreements, dated as of the date
hereof ("Amendment No. 5"; capitalized terms used but not defined in this
Officer's Certificate having the meaning set forth in Amendment No. 5), between
the Seller, Pameco Corporation, Redwood Receivables Corporation (the
"Purchaser") and General Electric Capital Corporation, and for the benefit of
the Purchaser, the Operating Agent and General Electric Capital Corporation, as
follows:
(1) after giving effect to the effectiveness of Amendment No. 5, no
Termination Event or Incipient Event will have occurred and be continuing; and
(2) the representations and warranties of the Seller contained in
Section 4.01 of the Purchase Agreement, in the Transfer Agreement and in any
other document, certificate or financial or other statement delivered by the
Seller in connection with the Purchase Agreement or the Transfer Agreement are
true and correct in all material respects and with the same force and effect as
though such representations and warranties had been made as of such date, except
to the extent any such representations and warranties relate solely to an
earlier date.
IN WITNESS WHEREOF, I have signed and delivered this Officer's
Certificate this ___ day of June, 1999.
PAMECO SECURITIZATION CORPORATION
By:_______________________________
Name:
Title:
<PAGE>
ANNEX A-2
FORM OF OFFICER'S CERTIFICATE OF SERVICER
-----------------------------------------
Pameco Corporation
Officer's Certificate
I, [Name of Officer], the duly elected [Insert Title] of Pameco
Corporation (the "Servicer"), hereby certify pursuant to Section 5.1(d) of
Amendment No. 5 to Securitization Agreements, dated as of the date hereof
("Amendment No. 5"; capitalized terms used but not defined in this Officer's
Certificate having the meaning set forth in Amendment No. 5), between Pameco
Securitization Corporation, the Servicer, Redwood Receivables Corporation (the
"Purchaser") and General Electric Capital Corporation, and for the benefit of
the Purchaser, the Operating Agent and General Electric Capital Corporation, as
follows:
(1) after giving effect to the effectiveness of Amendment No. 5, no
Termination Event or Incipient Event will have occurred and be continuing; and
(2) the representations and warranties of the Seller contained in
Section 4.01 of the Purchase Agreement, in the Transfer Agreement and in any
other document, certificate or financial or other statement delivered by the
Seller in connection with the Purchase Agreement or the Transfer Agreement are
true and correct in all material respects and with the same force and effect as
though such representations and warranties had been made as of such date, except
to the extent any such representations and warranties relate solely to an
earlier date.
IN WITNESS WHEREOF, I have signed and delivered this Officer's
Certificate this ___ day of June, 1999.
PAMECO CORPORATION
By:_______________________________
Name:
Title:
<PAGE>
EXHIBIT 10.28
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION FROM REGISTRATION, UNDER
SAID ACT AND LAWS.
CONTINGENT WARRANT TO SUBSCRIBE FOR
SHARES OF COMMON STOCK
OF
PAMECO CORPORATION
Expires June 11, 2009
No. W-[__] New York, New York
June 11, 1999
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, PAMECO CORPORATION, a Georgia corporation (together with its
successors and assigns, the "Issuer"), hereby certifies that [Lender], or its
registered assigns ("Holder") is entitled to subscribe for, during the period
specified in this Warrant, the number of shares (subject to adjustment as
hereinafter provided) of the duly authorized, validly issued, fully paid and
non-assessable Common Stock of the Issuer equal to the quotient of (i) [Lender's
Tranche B pro rata share of $7,000,000] divided by (ii) the Warrant Price,
subject, however, to the provisions and upon the terms and conditions
hereinafter set forth.
This Warrant is issued as partial consideration for concessions and other
financial accommodations (the "Amendment") made by the Holder in its capacity as
a lender under the Credit Agreement. Capitalized terms used in this Warrant and
not otherwise defined herein shall have the respective meanings specified in
Section 8 hereof or the Credit Agreement, as applicable.
- ---------
1. Term. The right to subscribe for shares of Warrant Stock represented
----
hereby shall (a) commence on February 29, 2000 at 5:00 p.m. New York City time
(the "Time"), if, (i)(x) the Consolidated Senior Debt Leverage Ratio is greater
than or equal to 5.0 for the four consecutive fiscal quarters of the Issuer
ending February 29, 2000 and (y) the Tranche B Term Loan shall not have been
paid in full by the Time or (ii) after giving effect to any refinancing of the
Tranche B Term Loan using the proceeds of Revolving Credit Loans, in whole or in
part, the aggregate Available Revolving Credit Commitment, at any time after the
date hereof and on or before the Time, shall be less than $20,000,000 and (b)
expire at 5:00 P.M., Eastern Time, on June 11, 2009 (such period being the
"Term"). In the event the certificate required to be delivered pursuant Section
9.2(a) of the Credit Agreement for the period ending February 29, 2000 (which
shall be used to determine the Consolidated Senior Debt Leverage Ratio for
purposes hereof) is not delivered as required by such Section and the provision
contained in clause (a)(i)(y) has not been satisfied, the
<PAGE>
Consolidated Senior Debt Leverage Ratio shall be deemed to be greater than or
equal to 5.0 on February 29, 2000 and the Term shall thereupon, regardless of
the actual Consolidated Senior Debt Leverage Ratio and regardless of the later
delivery of said certificate, be deemed to have commenced. Notwithstanding
anything contained in this Warrant to the contrary, in no event shall the Holder
be permitted to exercise this Warrant unless the Holder is a "Lender" under the
Credit Agreement on the date of exercise.
2. Method of Exercise; Issuance of New Warrant; Transfer and Exchange.
------------------------------------------------------------------
(a) Time of Exercise. The rights represented by this Warrant may be
----------------
exercised at any time and from time to time during the Term.
(b) Method of Exercise. The Holder hereof may exercise this Warrant by the
------------------
surrender of this Warrant (with the exercise form attached hereto duly executed)
at the principal office of the Issuer.
(c) Issuance of Stock Certificates. In the event of any exercise of the
------------------------------
rights represented by this Warrant in accordance with and subject to the terms
and conditions hereof (including Section 3(b)), certificates for the shares of
Warrant Stock shall be dated the date of such exercise and delivered to the
Holder hereof within a reasonable time, not exceeding five Business Days after
such exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock as of the date of such exercise.
(d) Transferability of Warrant. Subject to the provisions of Section 2(e)
--------------------------
hereof, this Warrant may be transferred on the books of the Issuer by the Holder
hereof in person or by duly authorized attorney, upon surrender of this Warrant
at the principal office of the Issuer, properly endorsed (by the Holder
executing an assignment in the form attached hereto) and upon payment of any
necessary transfer tax or other governmental charge imposed upon such transfer.
This Warrant is exchangeable at the principal office of the Issuer for Warrants
for the receipt of the same aggregate number of shares of Warrant Stock, each
new Warrant to represent the right to receive such number of shares of Warrant
Stock as the Holder hereof shall designate at the time of such exchange. All
Warrants issued on transfers or exchanges shall be dated the Closing Date and
shall be identical with this Warrant except as to the number of shares of
Warrant Stock issuable pursuant hereto.
(e) Compliance with Securities Laws.
-------------------------------
i. The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant and the shares of Warrant Stock to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment, and that the Holder will not
offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock
to be issued upon exercise hereof except pursuant to an effective registration
statement, or an exemption from registration, under the Securities Act and any
applicable state securities laws.
2
<PAGE>
ii. Except as provided in paragraph (iii) below, all certificates
representing shares of Warrant Stock issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the following form:
"THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION FROM
REGISTRATION, UNDER SAID ACT AND LAWS."
iii. The restrictions imposed by this Section 2(e) upon the transfer
of this Warrant and the shares of Warrant Stock to be received upon exercise
hereof shall terminate (A) when such securities shall have been effectively
registered under the Securities Act, or (B) upon the Issuer's receipt of an
opinion of counsel, in form and substance and from counsel reasonably
satisfactory to the Issuer (it being understood that in-house counsel to the
Holder shall be deemed to be acceptable counsel), addressed to the Issuer to the
effect that such restrictions are no longer required to ensure compliance with
the Securities Act. Whenever such restrictions shall cease and terminate as to
any such securities, the Holder thereof shall be entitled to receive from the
Issuer (or its transfer agent or registrar), without expense (other than
applicable transfer taxes, if any), new Warrants (or, in the case of shares of
Warrant Stock, new stock certificates) of like tenor not bearing the applicable
legends required by paragraph (ii) above relating to the Securities Act and
state securities laws.
(f) Continuing Rights of Holder. The Issuer will, at the time of or at any
---------------------------
time after each exercise of this Warrant, upon the request of the Holder hereof
or of any shares of Warrant Stock issued upon such exercise, acknowledge in
writing the extent, if any, of its continuing obligation to afford to such
Holder all rights to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant, provided that if any such
--------
Holder shall fail to make any such request, the failure shall not affect the
continuing obligation of the Issuer to afford such rights to such Holder.
3. Stock Fully Paid; Reservation and Listing of Shares; Covenants. (a) The
--------------------------------------------------------------
Issuer represents, warrants, covenants and agrees that all shares of Warrant
Stock which may be issued upon the exercise of this Warrant or otherwise
hereunder will, upon issuance, be duly authorized, validly issued, fully paid
and non-assessable and free from all taxes, liens and charges with respect to
issuance. The Issuer further covenants and agrees that during the Term, the
Issuer will at all times have authorized and reserved for the purpose of the
issue upon exercise of this Warrant a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant. The Issuer further
represents and warrants that there has been no change to the Issuer's Articles
of Incorporation since June 2, 1997.
3
<PAGE>
(b) If any shares of the Common Stock required to be reserved for issuance
upon exercise of this Warrant or as otherwise provided hereunder require
registration or qualification with any governmental authority under any federal
or state law before such shares may be so issued, the Issuer will in good faith
use its best efforts as expeditiously as possible at its expense to cause such
shares to be duly registered or qualified. If the Issuer shall list any shares
of Common Stock on any securities exchange it will, at its expense, list
thereon, maintain and increase when necessary such listing of, all shares of
Warrant Stock from time to time issued upon exercise of this Warrant or as
otherwise provided hereunder, and to the extent permissible under the applicable
securities exchange rules during the Term, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange,
and will maintain such listing of, any other securities which the Holder of this
Warrant shall be entitled to receive upon the exercise of this Warrant if at the
time any securities of the same class shall be listed on such securities
exchange by the Issuer.
(c) The Issuer shall not by any action including, without limitation,
amending the Articles of Incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms, and in the taking of all such actions as may be
necessary or appropriate to protect the rights of the Holder hereof against
impairment. Without limiting the generality of the foregoing, the Issuer will
(i) not (until three years from the Time, without the written consent of the
holders of 66 2/3% of the Warrant Stock) amend or modify any provision of the
Articles of Incorporation or by-laws of the Issuer in any manner that would
adversely affect in any way the powers, preferences or relative participating,
optional or other special rights of the Common Stock or which would adversely
affect the rights of the Holders of the Warrants, (ii) not (until three years
from the Time, without the written consent of the holders of 66 2/3% of the
Warrant Stock) issue any Capital Stock of any class which is preferred as to
dividends or as to the distribution of assets upon the voluntary or involuntary
dissolution, liquidation or winding up of the Issuer, (iii) take all such action
as may be reasonably necessary in order that the Issuer may validly and legally
issue fully paid and nonassessable shares of Common Stock, free and clear of any
liens, claims, encumbrances and restrictions (other than as provided herein)
upon the exercise of this Warrant, and (iv) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be reasonably necessary to enable the Issuer
to perform its obligations under this Warrant.
(d) During the Term, the Issuer shall not declare, make or pay any dividend
or other distribution, whether in cash, securities or other property, other than
Common Stock of the same class or series (a "Distribution"), with respect to its
Common Stock or any Common Stock Equivalent unless the Issuer concurrently makes
a cash payment to the Holder of this Warrant equal to the product of (1) the
amount of cash plus the fair market value of any property or securities
distributed with respect to each outstanding share of Common Stock or any Common
Stock Equivalent computed as provided in subparagraph (i) of Section 4(g) hereof
multiplied by (2) the Warrant Share Number.
4
<PAGE>
(e) Anything herein to the contrary notwithstanding, the number of shares
of Warrant Stock issuable upon exercise of this Warrant and all other Warrants
(in the aggregate) as determined as of the Time, may not equal or exceed 20% of
the number of outstanding shares of (i) Common Stock, plus (ii) the Issuer's
----
Class B Common Stock, par value $0.01 per share (the "Class B Stock"), plus
----
(iii) any other Securities issued by the Issuer and designated as common stock
(or a class thereof) in the Articles of Incorporation. This calculation shall
be based solely on the number of shares actually issued and outstanding before
the Warrants are issued, and the provisions of Section 4(g)(ii) shall not be
applicable to such calculation. If the effect of this Section 3(e) limits the
number of shares of Warrant Stock issuable upon exercise of the Warrant, to the
extent the number of shares of Common Stock issuable upon exercise of all
Warrants exceeds 20% of the number of shares of Common Stock, Class B Common
Stock and other Securities actually issued and outstanding, the Issuer shall pay
in cash, within three Business Days after delivery of the certificate described
in Section 1 hereof, to the holders of the Warrants (in the aggregate) pro-rata
in accordance with such holder's respective interest, an amount equal to (i)
that number of shares of Warrant Stock in excess of 20% (determined in
accordance with calculation set forth above) multiplied by (ii) the Warrant
----------
Price.
4. Adjustment of Warrant Share Number. The number and kind of securities
----------------------------------
issuable upon the exercise of this Warrant shall be subject to adjustment from
time to time upon the happening of certain events at any time during the Term as
follows:
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
------------------------------------------------------------------
Merger or Sale. In case the Issuer shall do any of the following (each a
- --------------
"Triggering Event") (i) consolidate with or merge into any other Person and the
Issuer shall not be the continuing, or surviving corporation of such
consolidation or merger, or (ii) permit any other Person to consolidate with or
merge into the Issuer and the Issuer shall be the continuing or surviving Person
but, in connection with such consolidation or merger, any Capital Stock of the
Issuer shall be changed into or exchanged for securities of any other Person or
cash or any other property, or (iii) transfer all or substantially all of its
properties or assets to any other Person, or (iv) effect a capital
reorganization or reclassification of its Capital Stock, then, and in the case
of each such Triggering Event proper provision shall be made so that, upon the
basis and the terms and in the manner provided in this Warrant, the Holder of
this Warrant shall be entitled upon the exercise hereof at any time after the
consummation of such Triggering Event, to the extent this Warrant is not
exercised prior to such Triggering Event, or is redeemed in connection with such
Triggering Event, to receive the securities, cash and property to which such
Holder would have been entitled upon the consummation of such Triggering Event
if such Holder had exercised the rights represented by this Warrant at the Time,
subject to adjustments (subsequent to such corporate action) as nearly
equivalent as possible to the adjustments provided for in Section 4 hereof.
i. Notwithstanding anything contained in this Warrant to the
contrary, the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to and reasonably
satisfactory to, the Holder of this Warrant, (a) the obligations of the Issuer
under this Warrant (and
5
<PAGE>
if the Issuer shall survive the consummation of such Triggering Event, such
assumption shall be in addition to, and shall not release the Issuer from any
continuing obligations of the Issuer under this Warrant) and (b) the obligation
to deliver to such Holder such shares of securities, cash or property as, in
accordance with the foregoing provisions of this paragraph (a), such Holder
shall be entitled to receive. In addition, such Person shall have similarly
delivered to such Holder an opinion of counsel for such Person (which may be in-
house counsel), which counsel shall be reasonably satisfactory to such Holder,
stating that this Warrant shall thereafter continue in full force and effect and
the terms hereof (including, without limitation, all of the provisions of this
paragraph (a)) shall be applicable to the securities, cash or property which
such Person may be required to deliver upon any exercise of this Warrant or the
exercise of any rights pursuant hereto.
(b) Subdivision or Combination of Shares. If the Issuer shall subdivide or
------------------------------------
combine any shares of Common Stock, the Issuer shall make such adjustments to
the number of shares of Warrant Stock issuable upon exercise by the Holder in
such a manner so as to maintain the Warrant Share Number in effect immediately
prior to such subdivision or adjustment without payment of any additional
consideration therefor.
(c) Certain Dividends and Distribution. If the Issuer shall:
----------------------------------
i. Stock Dividends. Pay a dividend in, or make any other
---------------
distribution to its stockholders (without consideration therefor) of, shares of
Common Stock, the Issuer shall pay, without any additional consideration
therefor, such dividend or make such other distribution in respect of the number
of shares of Warrant Stock issuable upon exercise by the Holder as would have
been payable to such Holder had such Holder been the Holder of record of such
Warrant Stock on the record date for such distribution or if no such record is
taken, on the date of such distribution; and appropriate provision therefor
shall be made a part of any such distribution;
ii. Liquidating Dividends, etc. Make a distribution of its property
--------------------------
to the Holders of its Common Stock as a dividend in liquidation or partial
liquidation or by way of return of capital other than as a dividend payable out
of funds legally available for dividends under the laws of the State of Georgia,
the Holder of this Warrant shall, upon exercise, be entitled to receive, in
addition to the number of shares of Warrant Stock receivable thereupon, and
without payment of any additional consideration therefor, a sum equal to the
amount of such property as would have been payable to such Holder had such
Holder been the Holder of record of such Warrant Stock on the record date for
such distribution or if no such record is taken, on the date of such
distribution; and appropriate provision therefor shall be made a part of any
such distribution.
(d) Issuance of Additional Shares of Common Stock. If the Issuer shall
---------------------------------------------
issue any Additional Shares of Common Stock (except shares of Common Stock
issued pursuant to the Pameco Employee Stock Purchase Plan) (otherwise than as
provided in the foregoing subsections (a) through (c) of this Section 4) for
consideration less than the current market price of the Common Stock, the Issuer
shall make such adjustments to the number of shares of Warrant Stock issuable
upon exercise by the Holder in such a manner so as to maintain the Warrant Share
Number without payment of any additional consideration therefor.
6
<PAGE>
(e) Issuance of Common Stock Equivalents. If the Issuer shall issue any
------------------------------------
Common Stock Equivalent with an exercise price less than the current market
price of the Common Stock, the Issuer shall make such adjustments to the number
of shares of Warrant Stock issuable upon exercise by the Holder in such a manner
so as to maintain the Warrant Share Number without payment of any additional
consideration therefor.
(f) Reserved.
--------
(g) Other Provisions Applicable to Adjustments Under this Section 4. The
---------------------------------------------------------------
following provisions shall be applicable to the making of adjustments in the
Warrant Share Number hereinbefore provided in Section 4:
i. Computation of Consideration. The consideration received by the
----------------------------
Issuer shall be deemed to be the following: to the extent that any Additional
Shares of Common Stock or any Common Stock Equivalents shall be issued for cash
consideration, the consideration received by the Issuer therefor, or if such
Additional Shares of Common Stock or Common Stock Equivalents are offered by the
Issuer for subscription, the subscription price, or, if such Additional Shares
of Common Stock or Common Stock Equivalents are sold to underwriters or dealers
for public offering without a subscription offering the public offering price,
in any such case excluding any amounts paid or receivable for accrued interest
or accrued dividends and without deduction of any compensation, discounts,
commissions, or expenses paid or incurred by the Issuer for or in connection
with the underwriting thereof or otherwise in connection with the issue thereof;
to the extent that such issuance shall be for a consideration other cash, then,
except as herein otherwise expressly provided the fair market value of such
consideration at the time of such issuance as determined in good faith by the
Board. The consideration for any Additional Shares of Common Stock issuable
pursuant to any Common Stock Equivalents shall be the consideration received by
the Issuer for issuing such Common Stock Equivalents, plus the additional
consideration payable to the Issuer upon the exercise, conversion or exchange of
such Common Stock Equivalents. In case of the issuance of any Additional Shares
of Common Stock or Common Stock Equivalents in payment or satisfaction of any
dividend upon any class of Capital Stock of the Issuer other than Common Stock,
the Issuer shall be deemed to have received for such Additional Shares of Common
Stock or Common Stock Equivalents a consideration equal to the amount of such
dividend so paid or satisfied. In any case, in which the consideration to be
received or paid shall be other than cash, the Board shall notify the Holder of
this Warrant of its good faith determination of the fair market value of such
consideration prior to payment or accepting receipt thereof. If, within thirty
days after receipt of said notice, the Majority Holders shall notify the Board
in writing of their objection to such determination, a determination of the fair
market value of such consideration shall be made by an Independent Appraiser
selected by the Majority Holders with the approval of the Board (which approval
shall not be unreasonably withheld), whose fees and expenses shall be paid by
the Issuer.
ii. Outstanding Common Stock. The number of shares of Common Stock
------------------------
at any time outstanding shall (a) not include any shares thereof then directly
or indirectly owned or held by or for the account of the Issuer or any of its
Subsidiaries, and (b) be deemed to include all shares
7
<PAGE>
of Common Stock then issuable upon conversion, exercise or exchange of any then
outstanding Common Stock Equivalents.
(h) Other Action Affecting Common Stock. If the Issuer shall take any
-----------------------------------
action affecting its Common Stock, other than an action described in any of the
foregoing subsections (a) through (g) of this Section 4, inclusive, and the
failure to make any adjustment would not fairly protect the rights represented
by this Warrant in accordance with the essential intent and principle of this
Section 4, then the Warrant Share Number shall be adjusted in such manner and at
such time as the Board may in good faith determine to be equitable in the
circumstances. In furtherance of but without limiting the foregoing, except to
the extent treatment may be more favorable to the Holder of this Warrant
pursuant to the other terms of this Warrant, including without limitation, this
Section 4, the Holder of this Warrant (treated as if the Holder of this Warrant
was a holder of the Warrant Stock resulting from the full exercise of this
Warrant) shall at no time be treated in a less favorable manner, or have less
favorable rights, in any respect, than the holders of the Issuer's Common Stock
generally.
(i) Adjustment of Warrant Share Number. Upon each adjustment pursuant to
----------------------------------
any of the foregoing provisions of this Section 4, the Warrant Share Number
shall be adjusted upwards to the nearest one hundredth of a whole share. If the
Issuer shall be in default under any provision contained in Section 3 of this
Warrant so that shares issued would not be validly issued, the adjustment of the
Warrant Share Number provided for in the foregoing sentence shall nonetheless be
made and the Holder of this Warrant shall be entitled to receive such greater
number of shares at the lowest price at which such shares may then be validly
issued under applicable law. Such exercise shall not constitute a waiver of any
claim arising against the Issuer by reason of its default under Section 3 of
this Warrant.
(j) For purposes of this Warrant, "current market price" of the Common
Stock shall be determined using the procedures set forth in the definition of
"Warrant Price", except that the time period of measurement shall be the 30
consecutive trading days ending three trading days preceding the event giving
rise to the determination thereof.
5. Notice of Adjustments. Whenever the Warrant Share Number shall be adjusted
---------------------
pursuant to Section 4 hereof (for purposes of this Section 5, each an
"adjustment"), the Issuer shall cause the independent accounting firm then
regularly engaged by it to report on its financial statements to prepare and
execute a certificate setting forth, in reasonable detail, the event requiring
the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated (including a description of the basis on which the
Board made any determination hereunder), and the Warrant Share Number after
giving effect to such adjustment, and shall cause copies of such certificate to
be delivered to the Holder of this Warrant promptly after each adjustment.
6. Transfers and Registration
--------------------------
(a) Transfers. Subject to the foregoing, including but not limited
---------
to Section 1 hereof, this Warrant or the Shares for which this
---------
Warrant may be exercised may be transferred in whole or in part by
the Holder to any Person, provided that such
8
<PAGE>
transfer is (i) pursuant to an effective registration statement
under the Securities Act, (ii) pursuant to Rule 144 or 144A (or any
successor provisions) under the Securities Act or (iii) pursuant to
a transaction that is otherwise exempt from the registration
requirements of the Securities Act; provided that in connection with
a transfer under clause (iii) the Issuer may require that the
transferor deliver an opinion of counsel reasonably satisfactory to
the Issuer (who may be an employee of the transferor) to the effect
set forth in clause (iii), in form and content reasonably acceptable
to the Issuer.
(b) Registration under the Securities Act of 1933.
---------------------------------------------
i. Piggy-Back Registration Rights. If the Issuer proposes to file a
------------------------------
registration statement under the Securities Act, covering securities
of the Issuer, whether for the Issuer's own account or for the
account of selling security holders (other than a registration
statement relating to an acquisition or merger or a registration
statement on Form S-4 or S-8 or subsequent similar forms or pursuant
to a registration under this Section 6(b), it shall advise the
------------
Holder and/or the holders of any Warrant Stock issuable or issued
upon the exercise of this Warrant (each such Holder or holder of
Warrant Stock being referred to herein as a "holder") by written
notice at least thirty days prior to the filing of such registration
statement and will upon the request of any such holder given within
thirty (15) Business Days after the receipt of any such notice
(which request shall include the number of shares of Warrant Stock
intended to be disposed of by such holder) use its best efforts to
effect the registration under the Securities Act of all Warrant
Stock that the Issuer has been requested to so register and to
include in any such registration statement such information as may
be required to permit a public offering of the Warrant Stock. The
Issuer is not required to include such Warrant Stock in a
registration statement relating to an offering of securities if the
managing underwriter has advised the Issuer that the inclusion of
such Warrant Stock should be limited due to market conditions. In
such event, the number of shares of Warrant Stock determined by such
underwriter to be the maximum number capable of being included in
such registration shall be allocated as follows: (i) first, to the
Warrant Stock (if any) sought to be included by the Issuer; (ii)
second, to the Warrant Stock sought to be included by the holders of
the Warrant Stock pro rata to the numbers of Warrant Stock sought to
be registered by each such holder; and (iii) last, to the Warrant
Stock sought to be included by any other securities holders. The
Issuer shall keep any such registration statement current for a
period of six months from the effective date of such registration
statement or until such earlier date as all of the registered
Warrant Stock shall have been sold. In connection with such
registration, the holders will execute and deliver such customary
underwriting documents as are requested by the managing underwriter
as a condition to the inclusion of the Warrant Stock in the
9
<PAGE>
registration statement, provided, however, that if, at any time
after giving written notice of its intention to register any
securities and prior to the effective date of the registration
statement filed in connection with such registration, the Issuer
shall determine for any reason not to register such securities, the
Issuer may, at its election, give written notice of such
determination to each holder who made a request as above provided
and thereupon the Issuer shall be relieved of its obligation to
register any such securities.
ii. Demand Registration Rights. If, at any time, the holders of
--------------------------
fifty-one percent (51%) of the Warrant Stock give notice (a "Demand
------
Notice") to the Issuer that such holders contemplate the transfer of
------
their Warrant Stock under circumstances that a public offering is
required, then the Issuer shall, as soon as practical, but not later
than sixty days from the date of receipt of such notice, use its
best efforts to cause a registration statement to be filed with the
Securities and Exchange Commission (along with any successor federal
agency having similar powers, the "Commission") to the end that such
----------
Warrant Stock may be sold under the Securities Act as promptly as
practical thereafter (such filing a "Demand Registration");
-------------------
provided, however, that the Issuer shall not be obligated to effect
-----------------
more than one registration pursuant to this Section 6(b). The Issuer
------------
shall use its best efforts to cause the registration statement filed
pursuant to this Section 6(b) to become effective within ninety days
------------
from the date of receipt of a Demand Notice. The Issuer has the
right to defer the filing of any such registration statement or any
amendment to such registration statement (a) in order to enable the
Issuer to prepare necessary financial statements for inclusion in
such registration statement, including any financial statements of
any corporation or other entity which has been or is expected to be
acquired, (b) in order that the Issuer not be required to disclose
material nonpublic information, provided that delays of the type
referred to in this clause (b) do not exceed ninety days in the
aggregate, or (c) in order that a filing not be made earlier than
two hundred seventy days after the effective date of any other
registration statement filed by the Issuer. If the Issuer is able to
register the holder's Warrant Stock on a Form S-3, or subsequent
similar form, in a manner which does not require inclusion in any
information concerning the Issuer other than to incorporate by
reference its filing under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the period referred to in clause (c)
------------
is one hundred thirty-five days. It is a condition to the Issuer's
obligations to file a registration statement pursuant to this
Section 6(b) and Section 6(c) of this Warrant that the holders of
------------ ------------
this Warrant and any Warrant Stock provide the Issuer with such
information as the Issuer may request concerning the sellers and
their plan of distribution. The Issuer shall use its best efforts to
keep any registration statement filed pursuant to this Section 6(b)
------------
current and effective until the earlier of (i) nine months from the
effective date of the registration
10
<PAGE>
statement or (ii) such date as all holders demanding registration
shall have sold all the registered shares or shall have advised the
Issuer that they no longer desire to sell such shares pursuant to
such registration statement. For purposes of this Section 6(b)(ii)
----------------
only, the Holder agrees that, if required in connection with the
contemplated offering by the managing underwriter, it and the
Warrant Stock shall be bound by any "lock-up" or other agreement
between the Issuer and any underwriter of Common Stock (or other
Securities of the Issuer) which may be entered into in connection
with each underwritten public offering of the Common Stock (or other
Securities of the Issuer) so long as the "lock-up" period does not
exceed ninety days following the commencement of the public
offering.
(c) Additional Provisions Concerning Registration. The following provisions
---------------------------------------------
of this Section 6(c) are also applicable to any registration statement filed
------------
pursuant to Section 6(b) or 6(c) of this Warrant:
------------ ----
i. The Issuer shall bear the entire cost and expense of any
registration of securities initiated under Section 6 of this
---------
Warrant. Notwithstanding the foregoing, any holder whose Warrant
Stock are included in any such registration statement pursuant to
this Section 6 shall, however, bear the fees of its own counsel and
---------
accountants and any transfer taxes or underwriting discounts or
commissions applicable to the Warrant Stock sold by the holder
pursuant thereto.
ii. The Issuer shall indemnify and hold harmless each such
holder (and its officers, directors and/or affiliates) and each
underwriter, within the meaning of the Securities Act, who may
purchase from or sell for any such holder any Warrant Stock from and
against any and all losses, claims, damages and liabilities
(including fees and expenses of counsel, which counsel may, if the
holders request, be separate from counsel for the Issuer) caused by
any untrue statement or alleged untrue statement of material fact
contained in the Registration Statement or any post-effective
amendment thereto or any registration statement under the Securities
Act or any prospectus included therein required to be filed or
furnished by reason of this Section 6 or any application or other
---------
filing under any state securities law caused by any omission or
alleged omissions to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading to which such holder or any such underwriter or any of
them may become subject under the Securities Act or other Federal or
state statutory law or regulation, at common law or otherwise
(collectively referred to herein as, the "Act"), except insofar as
---
such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished in writing to the Issuer
by any such holder or underwriter expressly for use therein, which
11
<PAGE>
indemnification includes each person, if any, who controls any such
underwriter within the meaning of each such Act.
iii. The holder of the Warrant Stock issued upon exercise of this
Warrant shall indemnify and hold harmless the Issuer (and its
officers, directors and/or affiliates) from and against any and all
losses, claims, damages and liabilities (including fees and expenses
of counsel, which counsel may, if the holders request, be separate
from counsel for the Issuer), but only with respect to information
relating to such holder furnished in writing by such holder to the
Issuer specifically for inclusion in such filings, caused by any
untrue statement or alleged untrue statement of material fact
contained in the Registration Statement or any post-effective
amendment thereto or any registration statement under the Securities
Act or any prospectus included therein required to be filed or
furnished by reason of this Section 6 or any application or other
---------
filing under any state securities law caused by any omission or
alleged omissions to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading to which the Issuer may become subject under the
Securities Act or other Federal or state statutory law or
regulation, at common law or otherwise (collectively referred to
herein as, the "Act"); provided that any amount the holder shall be
---
liable for pursuant to this clause (iii) shall be limited to net
proceeds received by such holder from such offering.
iv. The Issuer shall use its best efforts to qualify the Warrant
Stock for sale in such states as it is otherwise qualifying its
securities for sale, or in respect of a Demand Registration, in such
states as are reasonably requested by the applicable holder.
However, in no event is the Issuer required to submit to the
jurisdiction of any state other than for the limited consent of
service of process relating to the offering or subject itself to
taxation in any such jurisdiction. The Issuer shall also provide
each holder with a reasonable number of prospectuses upon request.
v. Neither the giving of any notice by any holder nor the making of
any request for prospectuses imposes any obligation upon any holder
making such request to sell any Warrant Stock or exercise this
Warrant but only if such holder elects, in writing, prior to the
effective date of the registration statement filed in connection
with such registration, not to register such Warrant Stock, and if
no such election shall be timely so filed, then such holder shall
sell such shares in such registration on the same terms and
conditions as apply to the Issuer and, if the Warrant with respect
to such Warrant Stock requested to be so registered has not been
exercised, shall exercise same prior to the effective date of such
registration statement.
12
<PAGE>
vi. The Issuer's agreements with respect to this Warrant or the
Warrant Stock in this Section 6 continue in effect regardless of the
---------
exercise and surrender of this Warrant.
(d) Listing Rights. If the Issuer at any time lists any securities of
--------------
the same class as those issuable on the exercise of this Warrant on any
national securities exchange, the Issuer will, at its expense,
simultaneously list on that exchange, an official notice of issuance
upon the exercise of this Warrant, and maintain such listing of, all
Warrant Stock or other securities from time to time issuable upon the
exercise of this Warrant.
(e) Contribution. If the indemnification provided for in this
------------
Section 6 from the indemnifying party is unavailable to an indemnified
---------
party hereunder in respect of any losses, claims, damages, liabilities
or expenses referred to therein, then the indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any
other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact, has been made
by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with any investigation
or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6 were determined by pro rata allocation
---------
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
7. Fractional Shares. No fractional shares of Warrant Stock will be issued in
-----------------
connection with the exercise hereof, but in lieu of such fractional shares, the
number of shares to be issued in connection with the exercise hereof will be
adjusted upwards to the nearest one hundredth of a whole share and the Holder of
this Warrant shall be entitled to receive such greater number of shares at the
lowest price at which such shares may then be validly issued under applicable
law.
13
<PAGE>
8. Definitions. For the purposes of this Warrant, the following terms have
-----------
the following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock
issued by the Issuer after the Closing Date, and all shares of Other
Common, if any, issued by the Issuer after the Closing Date, except the
Warrant Stock.
"Articles of Incorporation" means the Articles of Incorporation of the
Issuer as in effect on the Closing Date, and as hereafter from time to time
amended, modified, supplemented or restated in accordance with its terms
and pursuant to applicable law.
"Board" shall mean the Board or Directors of the Issuer.
"Business Day" means any day except a Saturday, a Sunday or a legal
holiday in New York City or the State of Georgia.
"Capital Stock" means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (ii) all partnership interests (whether general or
limited) in any Person which is a partnership, (iii) all membership
interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any
other type.
"Closing Date" means June 11, 1999.
"Common Stock" means the Class A Common Stock, $0.01 par value, of the
Issuer and any other Capital Stock into which such stock may hereafter be
changed.
"Common Stock Equivalent" means any Convertible Security or warrant,
option or other right to subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Security or any stock appreciation right or
other right to receive any payment based upon the value of the Common
Stock.
"Convertible Securities" means evidences of Indebtedness, shares of
Capital Stock or other Securities which are or may be at any time
convertible into or exchangeable for Additional Shares of Common Stock. The
term "Convertible Security" means one of the Convertible Securities.
"Credit Agreement" means that certain Amended and Restated Credit
Agreement dated as of March 10, 1998, as such agreement may from time to
time be further amended, restated, modified or supplemented in accordance
with its terms.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute at the time in effect.
14
<PAGE>
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
"Holders" mean the Persons who shall from time to time own any
Warrant. The term "Holder" means one of the Holders.
"Indebtedness" has the meaning provided in the Credit Agreement.
"Independent Appraiser" means a nationally recognized investment
banking firm or other nationally recognized firm that is regularly engaged
in the business of appraising the Capital Stock or assets of corporations
or other entities as going concerns, and which is not affiliated with
either the Issuer or the Holder of any Warrant.
"Issuer" means Pameco Corporation, a Georgia corporation, and its
successors.
"Majority Holders" means at any time the Holders of Warrants
exercisable for fifty-one percent (51%) of the shares of Warrant Stock
issuable under the Warrants at the time outstanding.
"Other Common" means any Capital Stock of the Issuer of any class
which shall be authorized at any time after the date of this Warrant (other
than Common Stock) and which shall have the right to participate in the
distribution of earnings and assets of the Issuer without limitation as to
amount.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association,
corporation, company, institution, entity, party, or government (whether
national, federal, state, county, city municipal, or otherwise, including,
without limitation, any instrumentality, division, agency, body, or
department of any of the foregoing.
"Securities" means any debt or equity securities of the Issuer,
whether now or hereafter authorized, any instrument convertible into or
exchangeable for Securities or a Security, and any option, warrant or other
right to purchase or acquire any Security "Security" means one of the
Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding
Voting Stock shall at the time be owned directly or indirectly by the
Issuer or by one or more of its Subsidiaries, or by the Issuer and one or
more of its Subsidiaries.
"Voting Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) having
ordinary voting power for the
15
<PAGE>
election of a majority of the Members of the Board (or other governing
body) of such corporation, other than Capital Stock having such power only
by reason of the happening of a contingency.
"Warrants" means the Warrants issued in connection with the Amendment,
including, without limitation, this Warrant, and any other warrants of like
tenor issued in substitution or exchange for any thereof pursuant to the
provisions of Section 2(c) or 2(d) hereof or of any of such other Warrants.
------------ ----
"Warrant Price" means the average of the daily market prices of the
Common Stock for the period of 30 consecutive trading days ending three
trading days preceding February 29, 2000. The market price for each such
day shall be the last sale price on such day as reported on the New York
Stock Exchange Consolidated Tape, or, if the Common Stock is not listed on
the New York Stock Exchange, Inc. or reported on such Consolidated Tape,
then the last sale price on such day on the principal domestic stock
exchange on which such Stock is then listed or admitted to trading, or, if
no sale takes place on such day on such exchange, the average of the
closing bid and asked prices on such day as officially quoted on such
exchange, or, if the Common Stock is not then listed or admitted to trading
on any domestic stock exchange but is quoted in the National Market System
("NMS/NASDAQ") of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ"), then the Warrant Price for each such
trading day shall be the last sale price on such day as quoted by
NMS/NASDAQ, or, if no sale takes place on such day or if the Common Stock,
is neither listed or admitted to trading on any domestic stock exchange nor
quoted on such NMS/NASDAQ, then the Warrant Price for each such trading day
shall be the average of the reported closing bid and asked price quotations
on such day in the over-the-counter market, as reported by NASDAQ, or, if
not so reported, as furnished by the National Quotation Bureau, Inc., or if
such firm at the time is not engaged in the business of reporting such
prices, as furnished by any similar firm then engaged in such business as
selected by the Issuer, or if there is no such firm, as furnished by any
member of the National Association of Securities Dealers, Inc. selected by
the Issuer with the written approval of the Majority Holders. If at any
time the Common Stock is not listed on any domestic exchange or quoted in
the domestic over-the-counter market the Warrant Price shall be deemed to
be the fair market value per share of Common Stock as determined in good
faith by the Board and agreed to by the Majority Holders. If the Majority
Holders shall notify the Board in writing of their disagreement as to such
fair market value as determined by the Board, a determination of the fair
market value of such Common Stock shall be made by an Independent Appraiser
selected by the Majority Holders and consented to by the Issuer (which
consent shall not be unreasonably withheld), whose fees and expenses shall
be paid equally by the Issuer on the one hand and the holders of the
Warrants on the other hand. The determination of fair market value by the
Board and such Appraiser shall be based upon the fair market value of the
Issuer determined on a going concern basis as between a willing buyer and a
willing seller and taking into account all relevant factors determinative
of value, and shall be final and binding on all parties. In determining the
fair market value of any shares of Common Stock, no consideration shall be
given to any restrictions on transfer of
16
<PAGE>
the Common Stock imposed by agreement or by federal or state securities
laws, or to the existence or absence of, or any limitation on, voting
rights. Notwithstanding anything to the contrary contained or described in
this Warrant or otherwise (except as set forth in Section 3(e)), including
-------------
without limitation, any action described in Section 4 of this Warrant, the
number of shares of Warrant Stock represented by this Warrant on the first
trading day (the term "trading day" determined as any single trading day
would be determined in accordance with the foregoing) occurring on or after
the Time (the "Spot Date"), shall not be less than that number which, when
multiplied by the market price (as determined above, but without
considering any day other than the Spot Date in such determination) of the
Common Stock on the Spot Date results in an amount of less than the amount
set forth in clause (i) of the first paragraph of this Warrant.
"Warrant Share Number" means the proportion that the aggregate number
of shares of Warrant Stock which may be obtained upon exercise of this
Warrant at the Time bears to the aggregate outstanding shares of Common
Stock of the Issuer (determined in accordance with Section 4(g)(ii)) at the
Time, after giving effect to all prior adjustments to such number made or
required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any
Warrant or Warrants.
9. Information. As long as this Warrant is outstanding, the Issuer shall
-----------
deliver to the Holder hereof and to each holder of shares of Warrant Stock the
documents and other information required under Section 9 of the Credit Agreement
within the applicable time period specified therein for so long as the Credit
Agreement is then in effect.
10. Reserved
--------
11. Tax Treatment; Further Assurances.
----------------------------------
The Issuer and Holder acknowledge and agree that this Warrant shall
not be treated as part of any "investment unit" for federal, state and
local income tax purposes. Further, the Issuer covenants and agrees that
it shall not take any deduction, for federal, state and local income tax
purposes, for any amounts related to this Warrant, unless and until the
Warrant is exercised. The Issuer and the Holder agree to promptly file, or
cause to be promptly filed, with all appropriate governmental authorities
all notices, registrations, declarations, applications and other documents
as may be necessary to exercise the Warrant including, without limitation,
such filings and approvals required under the Hart-Scott-Rodino Act and
applicable foreign, federal or state laws. The Issuer shall cooperate with
the Holder in connection therewith in supplying such information as may be
reasonably necessary for the Holder to complete such filings and approvals.
The exercise of the Warrant hereunder by the Holder shall be conditioned on
the making of all such filings.
12. Supplying Information
---------------------
17
<PAGE>
The Issuer shall cooperate with each holder of a Warrant and each
holder of Warrant Stock in supplying such information as may be reasonably
necessary for such holder to complete and file any information reporting
forms presently or hereafter required by the Commission as a condition to
the availability of an exemption from the Securities Act for the sale of
any Warrant Stock. For so long as the Issuer has any class of securities
registered under the Exchange Act, it shall use its best efforts to at all
times make public information available so as to afford the holders of the
Warrants and the Warrant Stock the benefits of Rule 144 of the Commission
in connection with resales.
13. Loss or Mutilation
------------------
Upon receipt by the Issuer from any Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and an indemnity reasonably satisfactory to it
(it being understood that the written agreement of Holder shall be a
sufficient indemnity) and, in case of mutilation, upon surrender and
cancellation hereof, the Issuer will execute and deliver in lieu hereof a
new Warrant of like tenor to such Holder; provided, however, in the case of
-------- -------
mutilation, no indemnity shall be required if this Warrant in identifiable
form is surrendered to the Issuer for cancellation.
14. Office of the Issuer
--------------------
As long as the Warrant (or any portion thereof) remains outstanding,
the Issuer shall maintain an office or agency, which may be the principal
executive offices of the Issuer, where the Warrant may be presented for
exercise, registration of transfer, division or combination as provided in
this Warrant. Such office shall initially be the principal office of the
Issuer as set forth in Section 20 hereof and, thereafter, such office shall
----------
be the office of the Issuer or of an agency designated by the Issuer in a
notice delivered to the registered holders of all Warrant.
15. Reserved
--------
16. Shareholder Rights. This Warrant shall not entitle the Holder hereof to
------------------
any voting rights or other rights as a shareholder of the Issuer until the
exercise of the rights by the Holder of this Warrant at which time the holder of
shares of Warrant Stock issued upon exercise hereof shall have all voting and
other rights of a shareholder under the Articles of Incorporation or under
applicable law.
17. Restrictions and Limitations on Corporate Action. At any and all times
------------------------------------------------
prior to the Time that the Holder holds this Warrant, the Issuer shall not, and
shall not permit any Subsidiary to, without the written consent of the Holder,
which consent will not be unreasonably withheld, merge or consolidate with or
into another corporation (other than the Issuer or any wholly-owned subsidiary
of the Issuer), liquidate, wind up or dissolve, or sell, assign, lease or
otherwise dispose of or voluntarily part with the control of (whether in one
18
<PAGE>
transaction or a series of transactions) all, or substantially all, of its
assets, including intellectual property, unless in the case of a merger or
consolidation, the Issuer is the surviving Person or, if it is not the surviving
Person, the surviving Person agrees to be bound by the terms and conditions of
this Warrant.
18. Amendment and Waiver. Any term, covenant, agreement or condition in this
--------------------
Warrant may be amended, or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the
Majority Holders; provided, however, that no such amendment or waiver shall
-----------------
reduce the Warrant Share Number, shorten the period during which this Warrant
may be exercised or modify any provision of this Section 18 without the consent
----------
of the Holder of this Warrant.
19. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
20. Notices. All notices and other communications provided for hereunder shall
-------
be in writing and delivered by hand or sent by first class mail, or sent by
telecopy (with such telecopy to be confirmed promptly in writing sent by first
class mail), and if to the Holder of this Warrant or of Warrant Stock issued
pursuant hereto, addressed to such Holder at its last known address or telecopy
number appearing on the books of the Issuer maintained for such purposes, and if
to the Issuer, addressed to:
Pameco Corporation
1000 Center Place
Norcross, Georgia 30092
Attention: Chief Financial Officer
Telecopy No.: (770) 798-0621
or to such other address or addresses or telecopy number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. All such communications shall be deemed to have been given or
made when so delivered by hand or sent by telecopy, or three business days after
being so mailed.
21. Remedies. The Issuer stipulates that the remedies at law of the Holder of
--------
this Warrant in the event of any default or threatened default by the Issuer in
the performance of or compliance with any of the terms of this Warrant are not
and will not be adequate and that, to the fullest extent permitted by law, such
terms may be specifically enforced by a decree for the specific performance of
any agreement contained herein or by an injunction against a violation of any of
the terms hereof or otherwise.
22. Successors and Assigns. This Warrant and the rights evidenced hereby
----------------------
shall inure to the benefit of and be binding upon the successors and assigns of
the Issuer, the Holder
19
<PAGE>
hereof and (to the extent provided herein) the Holders of Warrant Stock issued
pursuant hereto, and shall be enforceable by any such Holder or Holder of
Warrant Stock.
23. Modification and Severability. If, in any action before any court or
-----------------------------
agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
24. Integration. This Warrant replaces all prior agreements, supersedes all
-----------
prior negotiations and constitutes the entire agreement of the parties with
respect to the transactions contemplated herein. References to the Credit
Agreement herein shall, to the extent that the obligations thereunder have been
repaid and such Credit Agreement has terminated, mean the Credit Agreement as in
effect immediately prior to its termination.
25. Offerees; Blue-Sky Laws. Except for options granted and sales of common
-----------------------
stock to certain employees and directors of the Issuer, neither the Issuer nor
anyone acting on its behalf has offered any common stock or any other security
of the Issuer within the 12 month period preceding the date of this Agreement
for sale to, or solicited any offers to buy the same from, any person or
organization other than the Holder or to persons who would be "accredited
investors" as defined in Regulation D of the Securities Act except for the
warrants identified on Schedule A hereto as of the date hereof. Neither the
----------
Issuer nor anyone acting on its behalf has in the past or will hereafter sell,
offer for sale or solicit offers to buy any of such securities so as to bring
the offer, issuance or sale of the Warrants within the registration requirements
set forth in Section 5 of the Securities Act. The Issuer has complied and will
comply with all applicable state "blue-sky" or securities laws in connection
with the issuance and sale of Warrants and the Warrant Stock.
26. Registration Rights. The Issuer has no obligation to register under the
-------------------
Securities Act any of its presently outstanding securities or any securities
that it may hereafter issue.
27. Subsequent Registration Rights. From and after the date hereof, the Issuer
------------------------------
shall not enter into any agreement granting any holder or prospective holder of
any securities of the Issuer registration rights with respect to such securities
unless such rights are subordinate to the registration rights of the Holder.
28. Headings. The headings of the Sections of this Warrant are for convenience
--------
of reference only and shall not, for any purpose, be deemed a part of this
Warrant.
[signature page follows]
20
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Warrant to be executed by
its officer duly authorized as of June __, 1999.
PAMECO CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
21
<PAGE>
SCHEDULE A
----------
Existing Warrants
22
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
of Pameco Corporation listed below of our report dated May 21,1999, except for
the Subsequent Event Section of Note 4 as to which the date is June 11, 1999,
with respect to the consolidated financial statements and schedule of Pameco
Corporation included in this Annual Report (Form 10-K) for the year ended
February 28, 1999.
Registration Statement No. 333-33939 on Form S-8, dated August 19, 1997 and
related Prospectus.
Registration Statement No. 333-43849 on Form S-8, dated January 7, 1998 and
related Prospectus.
/s/ Ernst & Young LLP
Atlanta, Georgia
June 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PAMECO CORPORATION FOR THE YEAR ENDED FEBRUARY 28, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 148
<SECURITIES> 0
<RECEIVABLES> 41,717
<ALLOWANCES> 6,210
<INVENTORY> 157,621
<CURRENT-ASSETS> 197,425
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 273,888
<CURRENT-LIABILITIES> 99,905
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 273,888
<SALES> 625,042
<TOTAL-REVENUES> 625,042
<CGS> 478,093
<TOTAL-COSTS> 618,111
<OTHER-EXPENSES> 2,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,146
<INCOME-PRETAX> (1,119)
<INCOME-TAX> (931)
<INCOME-CONTINUING> (188)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (188)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
