FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE 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 (I.R.S. employer identification
of 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)
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date.
Class A Common Stock, $.01 par value, 4,878,284 shares and Class B
Common Stock, $.01 par value, 3,942,782 shares, both as of October 7,
1998.
<PAGE>
PAMECO CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-August 31, 1998
and February 28, 1998 3
Condensed Consolidated Statements of Income-Three
Months ended August 31, 1998 and 1997 4
Condensed Consolidated Statements of Income-Six
Months ended August 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows-Six
Months ended August 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
PAMECO CORPORATION
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
August 31, February 28,
1998 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 141 $ 142
Accounts receivable, less allowance of $4,548 at August 31, 1998
and $3,992 at February 28, 1998 49,155 35,266
Inventories 146,229 123,041
Prepaid expenses and other current assets 2,226 1,554
---------- ----------
Total current assets 197,751 160,003
Property and equipment, net 15,491 11,603
Excess of cost over acquired net assets, net 43,060 25,613
Other assets 316 806
Deferred income tax assets 12,607 12,787
---------- ----------
Total assets $ 269,225 $ 210,812
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $74,024 $60,323
Accrued compensation and withholdings 4,858 5,115
Other accrued liabilities and expenses 23,553 18,112
Notes payable --- 7,700
---------- ----------
Total current liabilities 102,435 91,250
Long-term liabilities:
Debt 78,647 42,072
Warranty reserves and other 4,362 3,839
---------- ----------
Total long-term liabilities 83,009 45,911
Excess of acquired net assets over cost, net 4,387 4,999
Shareholders' equity:
Class A common stock, $.01 par value-authorized 40,000 shares;
4,767 and 4,665 shares issued and outstanding at August 31, 1998
and February 28, 1998, respectively 48 47
Class B common stock, $.01 par value-authorized 20,000 shares; 4,046
shares issued and outstanding at August 31, 1998 and February 28,
1998, respectively 41 41
Capital in excess of par value 37,642 37,092
Retained earnings 42,263 32,072
---------- ----------
79,994 69,252
Note receivable from shareholder (600) (600)
Total shareholders' equity 79,394 68,652
---------- ----------
Total liabilities and shareholders' equity $269,225 $210,812
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3<PAGE>
<TABLE>
<CAPTION>
PAMECO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, per except share amounts)
(UNAUDITED)
Three Months Ended Six Months Ended
August 31 August 31
----------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $210,293 $146,460 $355,487 $260,195
Costs and expenses:
Cost of products sold 159,810 112,078 270,956 199,202
Warehousing, selling, and administrative expenses 35,006 23,853 64,424 47,062
-------- -------- -------- --------
194,816 135,931 335,380 246,264
-------- -------- -------- --------
Operating earnings 15,477 10,529 20,107 13,931
Other expense:
Interest expense, net (1,286) (19) (2,308) (1,238)
Discount on sale of accounts receivable and other expense (978) (912) (1,738) (1,608)
-------- -------- -------- --------
Income before income taxes 13,213 9,598 16,061 11,085
Provision for income taxes 4,905 3,624 5,870 4,096
-------- -------- -------- --------
Net income $ 8,308 $5,974 $10,191 $6,989
======== ======== ======== ========
Basic earnings per share $ 0.95 $0.70 $1.16 $1.02
======== ======== ======== ========
Basic weighted average shares outstanding 8,782 8,528 8,761 6,879
======== ======== ======== ========
Diluted earnings per share $ 0.91 $0.67 $1.11 $0.96
======== ======== ======== ========
Diluted weighted average shares outstanding 9,180 8,970 9,143 7,316
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4<PAGE>
<TABLE>
<CAPTION>
PAMECO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Six Months Ended
August 31
------------------------
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,191 $ 6,989
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Amortization of excess of acquired net assets over cost (612) (612)
Depreciation and other amortization 1,403 881
(Gain)loss on sale of property and equipment (19) 28
Changes in operating assets and liabilities net of assets
acquired and liabilities assumed:
Accounts receivable (6,945) (8,047)
Inventories, prepaid expenses and other assets (10,917) 16,155
Accounts payable and accrued liabilities 6,829 (3,720)
--------- ---------
Net cash (used in) provided by operating activities (70) 11,674
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment (4,132) (1,266)
Proceeds from sale of property and equipment 154 70
Business acquisitions (32,902) (18,341)
--------- ---------
Net cash used in investing activities (36,880) (19,537)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on working capital facility 400,262 278,485
Repayments on working capital facility (393,273) (296,935)
Borrowings on term loan 30,000 ---
Repayments on term loan (538) (18,600)
Payments on capital lease obligations (33) (221)
Payments on other debt (20) (14)
Issuance of common stock, net of expenses --- 45,214
Repurchase of treasury stock --- (1,207)
Proceeds from exercise of stock options 551 1,126
--------- ---------
Net cash provided by financing activities 36,949 7,848
--------- ---------
Net (decrease) in cash and cash equivalents (1) (15)
Cash and cash equivalents at beginning of period 142 145
--------- ---------
Cash and cash equivalents at end of period $ 141 $ 130
========= =========
Issuance of common stock in exchange for note receivable $ --- $ 600
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
August 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial
Statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three
and six month periods ended August 31,1998 are not necessarily
indicative of the results that may be expected for the year ending
February 28, 1999. The sale of products by Pameco Corporation (the
"Company" or "Pameco") is seasonal with sales generally increasing
during the warmer months beginning in April and peaking in the months
of June, July, and August. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended February
28,1998.
The balance sheet at February 28, 1998 included herein has been
derived from the audited financial statements at that date but does
not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
2. INVENTORIES
Inventories consist of goods held for resale and are stated at
the lower of cost or market. Cost is determined by the first-in,
first-out method.
6<PAGE>
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
----------------------- ------------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income applicable to common shareholders $8,308 $5,974 $10,191 $6,989
====== ====== ======= ======
Denominator:
Denominator for basic earnings per share-weighted average shares 8,782 8,528 8,761 6,879
Effect of dilutive securities:
Employee Stock Options 398 442 382 437
----- ------ ------- ------
Denominator for diluted earnings per share-adjusted weighted-
average shares and assumed conversions 9,180 8,970 9,143 7,316
====== ====== ======= ======
Basic earnings per share $ 0.95 $ 0.70 $ 1.16 $ 1.02
====== ====== ======= ======
Diluted earnings per share $ 0.91 $ 0.67 $ 1.11 $ 0.96
====== ====== ======= ======
</TABLE>
4. ACQUISITIONS
In June 1998, the Company purchased the HVAC operations and
substantially all the related assets of Park Heating and Air
Conditioning Supply Co., 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.
5. CONTINGENCIES
On November 18, 1996, United Refrigeration, Inc. ("United"), a
competitor of the Company, filed suit against Pameco in the United
States District Court for the Eastern District of Pennsylvania
claiming that Pameco had tortiously interfered with United's alleged
contract to purchase Sid Harvey's southeastern business operations
(the "Southeastern Assets"). United asserted that beginning on or
about August 23, 1996, it had met with Sid Harvey and had thereafter
negotiated an agreement (allegedly finalized on or about October 24,
1996) to purchase the Southeastern Assets for approximately $26
million and that Pameco tortiously interfered with this alleged
contract by offering "substantial inducements" to Sid Harvey and by
itself purchasing the Southeastern Assets. In the alternative, United
claimed that Pameco had tortiously interfered with United's
7<PAGE>
prospective contractual relations with Sid Harvey. On February 18,
1997, United filed an amended complaint adding Sid Harvey as a
defendant. In the amended complaint, United claimed that Sid Harvey
(i) had breached its alleged agreement to sell the Southeastern Assets
to United; (ii) had committed fraud in the inducement of that alleged
contract; (iii) had negligently misrepresented certain facts
concerning the sale of the operations and Sid Harvey's intention to
carry out the sale of those assets and (iv) was unjustly enriched by
certain information obtained from United during the United-Sid Harvey
negotiations.
Although the amended complaint did not demand specified damages,
it asserts that United should recover the "loss of its bargain,"
which United estimated to be $11.4 million, plus punitive damages.
Upon consummation of the Southeastern Assets acquisition, Pameco
agreed, based on certain written representations made by Sid Harvey
about the status of its discussions with United, to indemnify Sid
Harvey against all liabilities arising out of any action filed by
United in connection with the purchase of the Southeastern Assets.
Pameco and Sid Harvey asserted counterclaims against United
seeking to recover the damages they incurred in going forward with the
transaction in reliance on representations that the President of
United made to the President of Sid Harvey.
By agreement of the parties effective September 14, 1998, the
parties amicably resolved their differences, and all claims and
counterclaims asserted in the case were dismissed with prejudice and
mutual releases were exchanged. The terms of the settlement will not
have a material adverse effect on the Company's results of operations
or financial condition.
From time to time, the Company is involved in other claims and
legal proceedings which arise in the ordinary course of its 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.
8<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of income data to net sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31 August 31
------------------ -----------------
1998 1997 1998 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 76.0 76.5 76.2 76.6
----- ----- ----- -----
Gross profit 24.0 23.5 23.8 23.4
Warehousing, selling, and administrative expenses 16.6 16.3 18.1 18.1
----- ----- ----- -----
Operating earnings 7.4 7.2 5.7 5.3
Other expense:
Interest expense, net 0.6 0.0 0.7 0.5
Discount on sale of accounts receivable and other expense 0.5 0.6 0.5 0.5
----- ----- ----- -----
Income before income 6.3 6.6 4.5 4.3
Provision for income 2.3 2.5 1.6 1.6
----- ----- ----- -----
Net income 4.0% 4.1% 2.9% 2.7%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Net sales of $210.3 million in the quarter ended August 31, 1998
increased 43.6% from $146.5 million for the comparable period in 1997.
For the quarter, same store daily sales increased 13.5% as compared to
the prior year. Same store daily sales for the six months ended August 31,
1998 increased 10.5% over the same period in the prior year. Acquisitions
contributed the remainder of the net sales growth in the quarter and six
months ended August 31, 1998.
The net sales of HVAC products increased 18.8% on a daily same
store basis in the quarter ended August 31, 1998 as compared to the
prior year, while net sales for the six month period increased 17.2%
over the prior year. Net sales of refrigeration equipment, parts, and
supplies increased 6.7% and 2.4%, respectively, as compared to the
prior year on a daily same store basis in the quarter and six months
ended August 31, 1998. A significant portion of these increases in net sales
can be attributed to the market share gains experienced by the Thermalzone(TM)
private label equipment line in the first six months of this fiscal year.
Net sales in the quarter ended August 31, 1998 of products in the
Thermalzone(TM) private label equipment line increased 47.3% over
the prior year. Likewise, net sales in the six months ended August 31,
1998 of products in the Thermalzone(TM) private label equipment line
increased 48.1% over the prior year. As a result of the Company signing
17 new national accounts in the current fiscal year, net sales for the
quarter and six months ended August 31, 1998 from national accounts
also increased 36.7% and 33.3% over the prior year, respectively.
9<PAGE>
Gross profit for the quarter ended August 31, 1998 increased
46.8% to $50.5 million from $34.4 million in the prior year. For the
six months ended August 31, 1998, gross profit increased 38.6% to
$84.5 million from $61.0 million in the prior year. Greater sales volume
was the main contributor to the increased gross profit. The gross profit
percentage increased to 24.0% during the quarter ended August 31, 1998
as compared to 23.5% during the same quarter in the prior year.
Similarly, the gross profit percentage increased to 23.8% during the
six months ended August 31, 1998 as compared to 23.4% during the same
period in the prior year. The Company has continued to benefit from
more stringent pricing guidelines implemented on the point of sale
system in the first quarter of the current fiscal year. During the
year, the Company has also received improved terms and prompt payment
discounts from suppliers.
Warehousing, selling, and administrative expenses during the
quarter increased 46.8% to $35.0 million from $23.9 million in the
prior year. For the six months ended August 31, 1998, warehousing,
selling, and administrative expenses increased 36.9% to $64.4 million
from $47.1 million in the prior year. A significant amount of the
increase can be attributed to the normal operating expenses of the
acquired branches. As a percentage of net sales, warehousing, selling,
and administrative expenses increased to 16.6% in the quarter from
16.3% in the prior year. The increase was primarily due to increased
expenses associated with acquired branches not yet transitioned to the
Company's centralized management system, and an increase in the provision
relating to the Company's annual incentive programs. For the six months
ended August 31, 1998, warehousing, selling, and administrative expenses
remained constant with the prior year at 18.1%.
Interest expense during the quarter ended August 31, 1998
increased to $1.3 million from $19,000 in the previous year. For the
six months ended August 31, 1998, interest expense increased to $2.3
million from $1.2 million in the previous year. Since the Company
utilized the Working Capital Facility (as defined below) to fund all of
its acquisitions during the past year, the Company's average borrowings
under that line increased by $63.5 million over the previous year. The
accounts receivable securitization borrowing (the "Securitization Program")
was recorded as a sale of assets; therefore, approximately $60.0 million
of accounts receivable and debt are not reflected on the Company's
balance sheet at August 31, 1998. The discount on the sale of
accounts receivable of $1.0 million and $851,000 for the three months
ended August 31, 1998 and August 31, 1997, respectively, was recorded
as other expense on the statement of income. For the six months ended
August 31, 1998 and 1997, the discount on the sale of accounts
receivable that was recorded as other expense on the statement of
income was $1.8 million and $1.5 million, respectively. The average
rate of interest on all debt, including the Securitization Program,
for the quarter ended August 31, 1998 was 7.2%, which was unchanged
from the previous year.
Income taxes increased $1.3 million to $4.9 million for the
quarter ended August 31, 1998 due to greater income before taxes. The
Company's effective income tax rate was 37.1% for the three months ended
August 31, 1998 as compared to 37.8% in the prior year. Income taxes
increased $1.8 million to $5.9 million for the six months ended August
31, 1998 due to greater income before taxes. The Company's effective
income tax rate was 36.5% for the six months ended August 31, 1998 as
compared to 37.0% in the prior year. The Company's effective income
tax rate is lower than the statutory rate due primarily to nontaxable
amortization income.
10<PAGE>
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 (as defined below). For
the six months ended August 31, 1998, cash used by operating
activities was $70,000 compared to cash provided by operating
activities of $11.7 million for the six months ended August 31, 1997.
Net cash used in investing activities was $36.9 million for the six
months ended August 31, 1998 as compared to $19.5 million for the six
months ended August 31, 1997. In the three months ended August 31,
1998, the Company purchased the HVAC operations and related assets of
Keller Supply, Inc., George L. Johnston Co., Inc., and Park Heating
and Air Conditioning, Inc. for an aggregate cash price of $32.9
million as compared to $18.3 million for the acquisitions of Bellows-
Evans, Inc., Trigg Supply, Inc., Heating and Cooling Distributors,
Inc., Saez Refrigeration, Inc., and Superior Supply Company in the
prior year. Net cash provided by financing activities was $36.9
million for the six months ended August 31, 1998, while such
activities provided $7.8 million in the six months ended August 31,
1997.
The Company's working capital increased to $95.3 million at
August 31, 1998 from $68.8 million at February 28, 1998.
At August 31, 1998, the Company had senior borrowings of
$138.6 million under its $180.0 million Credit Facilities, of which
$21.2 million was unused and available. The Company's senior
indebtedness consists of $78.6 million under the Working Capital
Facility and $60.0 million under the Securitization Program
(collectively, the "Credit Facilities"). The Securitization Program
is an off balance sheet arrangement that provides for the transfer and
sale of accounts receivable to a special purpose corporation. The
weighted average interest rate on the Credit Facilities at August 31,
1998 was 7.2%. This rate fluctuates with the commercial paper and
LIBOR rates.
On August 6, 1998, the Working Capital Facility Credit Agreement
(the "Credit Agreement") was amended. The Credit Agreement provides a
facility commitment of $120.0 million, which includes a $80.0 million
Revolving Credit Loan (the "Revolver"), a $10.0 million swing-line
facility (the "Swingline") and two $15.0 million term loans ("Tranche
A" and "Tranche B). The Credit Agreement will expire on August 6,
2003. The Tranche A term loan matures on March 10, 2003 and the
Tranche B term loan matures on March 10, 2005.
The Company's capital expenditures, excluding acquisitions, for
the six months ended August 31, 1998, were $4.1 million as compared to
$1.3 million for the previous year. Such capital expenditures were
primarily for branch and distribution center leasehold improvements,
equipment, computer equipment and 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.
11<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.
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 has separated its Year 2000 project into four phases.
Within each phase, the Company reviews and addresses Year 2000 issues
with respect to both its information technology and non-information
technology systems. During Phase I, Millennium Impact Analysis, which
was completed in July 1998, the Company reviewed all its business segments
for Year 2000 issues. As issues were identified, the Company developed
strategies to resolve them. As a part of Phase II, Project Tactical
Planning, which was also completed in July 1998, a project budget and work
plan was developed to resolve the Year 2000 issues identified in the previous
phase. Currently, the Company is in the midst of Phase III Conversion and
System Training. By the end of this phase, the Company will have replaced
or modified all affected mission critical systems. The Company intends to
complete this phase in March 1999. In the final phase, Phase IV Year 2000
Simulation & Deployment, the Company will perform a simulation test to confirm
that all systems are compliant. The Company has scheduled completion of this
phase for September 1999.
In the absence of the steps outlined above, the Company's operations
could be adversely affected by Year 2000 issues. The Company is currently
replacing and upgrading its supply chain and financial management systems
with enterprise software that is Year 2000 compliant and which will also improve
the Company's responsiveness to its customers and suppliers. The Company has
also targeted non-compliant Point-Of-Sale (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 the date of this report, all responses have indicated that these
parties intend to be Year 2000 compliant. The Company will continue
to pursue surveys from unresponsive parties, as well as continue to
monitor the status of key third parties.
Since the Company primarily chose to replace its main operating
system to improve customer service, the costs associated with this
implementation are not considered Year 2000 related costs. The Company
has budgeted $500,000 for the replacement and upgrading of POS
hardware and software. The Company has budgeted an additional
$1,000,000 to replace non-compliant phone systems, security systems,
and office equipment. The Company anticipates the replacement of mission
critical systems to be completed by September 1999.
Should the Company or a number of its key suppliers not be in
compliance with Year 2000 requirements as of January 1, 2000, the
Company may not be able to timely provide reliable data to management.
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
12
<PAGE>
complete other transactions may be adversely affected. The Company is
in the process of developing its contingency plan to resolve currently
identified risk areas by January 1, 2000. 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 timely resolve their significant Year 2000 issues, it could
result in a material financial risk.
The statements in this report that relate to future plans,
expectations, events, performances, and the like are forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and the Securities and Exchange Act of 1934.
Actual results or events could differ materially from those described
in the forward-looking statements due to a variety of factors,
including inaccurate guarantees by computer hardware and software
vendors, third party non-compliance, difficulties obtaining appropriate
technical support due to the demand for individuals with the special skills
necessary to resolve Year 2000 issues and for the reasons outlined in the
Company's other filings with the SEC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 to the Condensed Consolidated Financial Statements
(Unaudited) contained in Part I of this Report.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on June 23, 1998.
The following individuals were elected to the Company's Board of
Directors.
For Withhold
--- --------
Class A
-------
Richard Bearse 3,702,976 28,554
G. Thomas Braswell, Jr. 3,700,076 31,454
Class B
-------
James R. Balkcom 4,046,346 0
Gerald V. Gurbacki 4,046,346 0
Michael H. Bulkin 4,046,346 0
Earl Dolive 4,046,346 0
H. Whitney Wagner 4,046,346 0
Thomas G. Weld 4,046,346 0
The shareholders ratified the Company's Employee Stock Option
Plan (Plan I).
Voting For 43,387,362 Voting Against 496,210 Abstaining 1,351
The shareholders ratified the Company's Employee Stock Option
Plan (Plan II).
Voting For 43,386,831 Voting Against 496,741 Abstaining 1,351
13<PAGE>
The shareholders amended the Company's Employee Stock Option Plan
(Plan I) to increase to 1,050,000 the maximum number of shares of
Class A Common Stock issuable under the Plan.
Voting For 43,392,621 Voting Against 486,209 Abstaining 6,093
The shareholders amended the Company's Employee Stock Option Plan
(Plan I) to allow employees terminated without cause a five business
day grace period to exercise stock options granted under the Plan.
Voting For 43,723,267 Voting Against 158,547 Abstaining 3,109
The shareholders amended the Company's Directors Stock Option
Plan to increase to 112,500 the maximum number of shares of Class A
Common Stock issuable under the Plan.
Voting For 43,758,047 Voting Against 160,158 Abstaining 8,293
Item 6. Exhibits and Reports on Form 8-K Exhibits
(a) Exhibits
10.14D Second Amendment, dated as of August 6, 1998 to the Amended
and Restated Credit Agreement, dated as of March 10, 1998 among
Pameco Corporation, the Lenders and General Electric Capital
Corporation
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 10, 1998 for the
purchase of the assets of Park Heating and Air Conditioning
Supply, Co., Inc., and an amended Form 8-K on September 8, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PAMECO CORPORATION
-----------------------------------
(Registrant)
By: /s/ THEODORE R. KALLGREN
-----------------------------------
Theodore R. Kallgren
Chief Financial Officer
October 14, 1998 (Mr. Kallgren has been duly authorized
to sign on behalf of the registrant)
14
<PAGE>
Exhibit Index
Exhibit No. Exhibit
10.14D Second Amendment, dated as of August 6, 1998 to the Amended
and Restated Credit Agreement, dated as of March 10, 1998 among
Pameco Corporation, the Lenders and General Electric Capital
Corporation
27. Financial Data Schedule (for SEC use only)
EXECUTION COPY
SECOND AMENDMENT
----------------
SECOND AMENDMENT (this "AMENDMENT"), dated as of August 6,
1998, to the Amended and Restated Credit Agreement, dated as of
March 10, 1998, as amended by the First Amendment, dated as of April
21, 1998 (as the same is being and may be further amended,
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 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 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 SECTION 1.1. () Section 1.1 of the
Credit Agreement is hereby amended by deleting therefrom the
definitions of the following defined terms in their respective
entireties and inserting in lieu thereof the following new
definitions:
""AVAILABLE REVOLVING CREDIT COMMITMENT", (a) when the sum
of the aggregate principal amount then outstanding of all Revolving
Credit Loans, Reimbursement Obligations and Swingline Loans is less
than $70,000,000, shall mean, as to any Lender at any time, an amount
equal to the excess, if any, of (i) such Lender's Revolving Credit
Percentage of $70,000,000 over (ii) the sum of (A) the aggregate
principal amount then outstanding of Revolving Credit Loans made by
such Lender and (B) such Lender's Revolving Credit Percentage of the
Reimbursement Obligations and Swingline Loans; (b) from and after the
first date on which the sum of the aggregate principal amount then
outstanding of all Revolving Credit Loans, Reimbursement Obligations
and Swingline Loans is $70,000,000 or greater, shall mean, as to any
Lender at any time, an amount equal to the excess, if any, of (i) such
Lender's Revolving Credit Commitment over (ii) the sum of (A) the
aggregate principal amount then outstanding of Revolving Credit Loans
made by such Lender and (B) such Lender's Revolving Credit Percentage
of the Reimbursement Obligations and Swingline Loans."
<PAGE>
""REVOLVING CREDIT TERMINATION DATE" shall mean August 6,
2003 or such earlier date as the Revolving Credit Commitments shall
terminate pursuant to the terms hereof (including, without limitation,
pursuant to Section 11 hereof)."
(b) The definition of "Borrowing Base" in Section 1.1 of
the Credit Agreement is hereby amended by deleting the amount
"50,000,000" where it appears therein and inserting in lieu thereof
the amount "90,000,000."
(c) The definition of "Capital Expenditures" in Section 1.1
of the Credit Agreement is hereby amended by deleting the amount
"$8,000,000" where it appears therein and inserting in lieu thereof
the amount "$9,000,000."
(d) Section 1.1 of the Credit Agreement is hereby amended
by inserting the following new definition in the appropriate
alphabetical order:
""REVOLVING CREDIT COMMITMENT REDUCTION FEE" shall have the
meaning ascribed thereto in Section 6.2 hereof."
3. AMENDMENT OF SECTION 3.1. Section 3.1 of the
Credit Agreement is hereby amended by deleting the amount
"$50,000,000" from paragraph (a) thereof and inserting in lieu thereof
the amount "$90,000,000."
4. AMENDMENT OF SECTION 6.2. Section 6.2 of the
Credit Agreement is hereby amended by deleting the first paragraph
therefrom in its entirety and inserting in lieu thereof the following:
"The Company may, at any time upon at least five Business
Days' prior irrevocable notice to the Agent, prepay all or
part of the Loans then outstanding and cash collateralize any
outstanding Reimbursement Obligations (after giving effect to
any Reimbursement Obligations terminated in a manner acceptable
to the Agent) in accordance with the provisions of subsection
5.1(c) and, simultaneously therewith, terminate the Revolving
Credit Commitments, in whole or in part, which notice shall
specify whether the prepayment is of Eurodollar Loans or
Index Rate Loans, the date of such prepayment, cash
collateralization and Commitment termination. Upon receipt
of such notice, the Agent shall promptly notify each relevant
Lender thereof. If any such notice is given, the amount
specified in such notice and cash collateralization of all
Reimbursement Obligations (or termination of Reimbursement
Obligations) shall be due and payable on the date specified
therein. Upon any termination of the Revolving Credit
Commitments, in whole or in part, on or before August 6, 2000,
the Company agrees to pay to each Lender (including GE Capital)
a fee (the "REVOLVING CREDIT COMMITMENT REDUCTION FEE") in an
amount equal to the product of (i) such Lender's Revolving
Credit Percentage multiplied by the dollar amount of such
terminated Revolving Credit Commitments and (ii) 0.25%. In no
event shall the Company have the right to reduce the Revolving
Credit Commitments, other than in accordance with the provisions
of this subsection 6.2. Amounts prepaid on account of Term
Loans may not be reborrowed. Partial prepayments of Term Loans
shall be in an aggregate principal amount of not less than
$5,000,000 and multiples of $1,000,000 in excess thereof."
<PAGE>
5. AMENDMENT OF SCHEDULE 1. Schedule 1 to the Credit
Agreement is hereby amended by deleting it in its entirety and
inserting in lieu thereof Annex A attached hereto.
6. AMENDMENT TO ANNEX A. Annex A to the Credit
Agreement is hereby amended by deleting it in its entirety and
inserting in lieu thereof Annex B attached hereto.
7. NEW PROMISSORY NOTES. On the Second Amendment
Effective Date, the Company shall execute and deliver to each
Revolving Credit Lender, in substitution and exchange for, but not in
payment of the Revolving Credit Note held by such Lender, a promissory
note (each, a "New Revolving Credit Note") substantially in the form
of Exhibit A-3 to the Credit Agreement, with appropriate insertions
therein as to payee, date and principal amount, payable to the order
of such Lender and in a principal amount equal to such Lender's
Revolving Credit Percentage of the Revolving Credit Commitments.
8. CONDITIONS TO EFFECTIVENESS. This Second
Amendment shall become effective (the actual date of such
effectiveness, the "SECOND AMENDMENT EFFECTIVE DATE") as of the date
first above written when:
(a) counterparts hereof shall have been duly executed and
delivered by each of the parties hereto and acknowledged by
Pameco Investment Company, Inc.;
(b) the Acknowledgement, Consent and Amendment dated as of
August 6, 1998 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, with a copy for each
Lender, a certificate of the Secretary or an Assistant
Secretary of each Loan Party, dated as of the Second
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 Second Amendment, the
Acknowledgment, Consent and Amendment attached hereto, the
New Revolving Credit Notes, the New Fee Letter (as defined
below) and related matters, certified by the Secretary or an
Assistant Secretary of such Loan Party as of the Second
Amendment Effective Date and (ii) as to the incumbency and
specimen signature of such Loan Party's officers executing
this Second 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, with a copy for each
Lender, true and complete copies of the certificate of
incorporation and by-laws of each Loan Party, certified as
of the Second Amendment Effective Date as complete and
correct copies thereof by the Secretary or an Assistant
Secretary of such Loan Party;
(e) the Agent shall have received with a counterpart for
each Lender the executed legal opinion of Kilpatrick
Stockton LLP, counsel to the Loan Parties, in form and
<PAGE>
substance satisfactory to the Agent;
(f) the Agent shall have received fees as required in the
Fee Letter dated August 6, 1998 from GE Capital to the
Company (the "NEW FEE LETTER"); and
(g) the Agent shall have received the New Revolving Credit
Notes in accordance with paragraph 7 of this Amendment.
9. COMPANY REPRESENTATIONS AND WARRANTIES. The
Company represents and warrants that:
(a) each of this Amendment and the New Revolving Credit
Notes has been duly authorized, executed and delivered by
the Company;
(b) each of this Amendment, the Credit Agreement as amended
by this Amendment and the New Revolving Credit Notes
constitutes the legal, valid and binding obligation of the
Company;
(c) each of the representations and warranties set forth in
Section 7 of the Credit Agreement are true and correct as of
the Second 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 and references to the "Revolving
Credit Notes" in the Credit Agreement shall be deemed
references to the New Revolving Credit Notes; and
(d) after giving effect to this Amendment, there does not
exist any Default or Event of Default.
10. PURCHASE AND SALE OF REVOLVING CREDIT COMMITMENTS
AND REVOLVING CREDIT LOANS AND RELATED PROVISIONS. (a) Upon the
Second Amendment Effective Date but immediately prior to any borrowing
on such date under the Credit Agreement, without the necessity of
further action by any party, each of the Revolving Credit Lenders
specified on Annex B hereto as "Selling Lenders" shall sell, transfer
and assign to the Revolving Credit Lenders specified on Annex B hereto
as "Purchasing Lenders" a portion of such Selling Lender's right,
title and interest in its outstanding Revolving Credit Loans and
participation in Letters of Credit, GE Guarantees, Letter of Credit
Reimbursement Obligations and Reimbursement Obligations, and each
Purchasing Lender shall purchase, take and acquire from the Selling
Lenders a portion of the Selling Lenders' right, title and interest in
and to their outstanding Revolving Credit Loans and participation in
Letters of Credit, GE Guarantees, Letter of Credit Reimbursement
Obligations and Reimbursement Obligations, so that after giving effect
to all such transfers, the outstanding Revolving Credit Loans and the
interests in the outstanding Letters of Credit held by each Selling
Lender and each Purchasing Lender shall be ratable in accordance with
such Lender's Revolving Credit Percentage.
(b) Prior to the Second Amendment Effective Date, the
Agent shall notify each Purchasing Lender and each Selling Lender of
the amounts to be funded and received, respectively, by each
Purchasing Lender and Selling Lender in order to give effect to the
foregoing transfers and to ensure that the outstanding Revolving
<PAGE>
Credit Loans and Letter of Credit interests of each of the Revolving
Credit Lenders properly reflects such transfers. The transfers shall
be ratable among the outstanding Index Rate Loans and each Tranche of
outstanding Eurodollar Loans and among the interests in each
outstanding Letter of Credit.
(c) All payments of interest or fees made after the
Second Amendment Effective Date shall be made in accordance with the
Applicable Margins, commitment fee rates and Commitments in effect
prior to the Second Amendment Effective Date for all accruals of
interest and fees immediately prior to the Second Amendment Effective
Date and in effect after giving effect to this Amendment for any
accruals thereof on or after the Second Amendment Effective Date.
(d) The Company hereby agrees to pay to each Selling
Lender any amount that would have been required to be payable under
section 6.6 of the Credit Agreement had the Revolving Credit Loan of
such Selling Lender been repaid to the extent of its transfers thereof
to the Purchasing Lenders in connection with this Section 10.
11. CONTINUING EFFECTS. 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.
12. 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.
13. 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.
14. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF NEW YORK.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment 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 /s/ Theodore R. Kallgren
Title: Vice President
Chief Financial Officer
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent
and as a Lender
By /s/ Craig Winslo
Title: [not listed]
FIRST UNION COMMERCIAL
CORPORATION
By /s/ Terri K. Lins
Title: Vice President
NATIONSBANK, N.A.
By /s/ Scot Turner
Title: Assistant Vice President
SUNTRUST BANK, ATLANTA
By Jenna H. Kelly
Title: Vice President
By /s/ [unreadable]
Title:_________________
<PAGE>
ANNEX A
TO THE SECOND AMENDMENT
<TABLE>
<CAPTION>
LENDING OFFICE AND COMMITMENTS
------------------------------
LENDER AND LENDING OFFICE PURCHASING OR TRANCHE A TRANCHE B REVOLVING
SELLING LENDER TERM LOAN TERM LOAN CREDIT
COMMITMENT COMMITMENT COMMITMENT
- -----------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C>
General Electric Capital Corporation Selling Lender $9,375,000.00 $9,375,000.00 $31,250,000.00
201 High Ridge Road
Stamford, Connecticut 06927
Tel: (203) 316-7607
Fax: (203) 316-7821
Contact: Craig Winslow
First Union Commercial Corporation Purchasing Lender $1,875,000.00 $1,875,000.00 $19,583,333.34
201 South College Street
Charlotte Plaza Building, CP 17
Charlotte, North Carolina 28288
Tel: (704) 374-6352
Fax: (704) 383-1409
Contact: Scott Eberhardt
NationsBank, N.A. Purchasing Lender $1,875,000.00 $1,875,000.00 $19,583,333.33
600 Peachtree Street N.E.
19th Floor
Atlanta, Georgia 30308
Tel: (404) 607-4621
Fax: (404) 607-6323
Contact: Scott Tatum
SunTrust Bank, Atlanta Purchasing Lender $1,875.000.00 $1,875,000.00 $19,583,333.33
25 Park Place
Atlanta, Georgia 30303
Tel: 9404) 230-5427
Fax: (404) 588-8833
Contact Jenna Kelly
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $15,000,000.00 $15,000,000.00 $90,000,000.00
- ------
======================================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PAMECO CORPORATION FOR THE THREE MONTHS ENDED AUGUST
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<CIK> 0001036283
<NAME> PAMECO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 141
<SECURITIES> 0
<RECEIVABLES> 53,703
<ALLOWANCES> 4,548
<INVENTORY> 146,229
<CURRENT-ASSETS> 197,751
<PP&E> 20,585
<DEPRECIATION> 5,094
<TOTAL-ASSETS> 269,225
<CURRENT-LIABILITIES> 102,435
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 269,225
<SALES> 210,293
<TOTAL-REVENUES> 210,293
<CGS> 159,810
<TOTAL-COSTS> 194,816
<OTHER-EXPENSES> 978
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,286
<INCOME-PRETAX> 13,213
<INCOME-TAX> 4,905
<INCOME-CONTINUING> 8,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,308
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.91
</TABLE>
