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 MAY 31, 1999
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
of incorporation or identification
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__
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, 5,417,261 shares and Class B Common Stock, $.01 par value, 3,792,129
shares, both as of July 13, 1999.
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PAMECO CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-May 31, 1999
and February 28, 1999 3
Condensed Consolidated Statements of Income-Three Months
ended May 31, 1999 and 1998 4
Consolidated Statements of Cash Flows-Three
Months ended May 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
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PAMECO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1999 1999
--------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 147 $ $148
Accounts receivable, less allowance of $ 6,094 at May
31, 1999 and $6,210 at February 28, 1999 35,583 35,507
Inventories, net 150,230 157,621
Prepaid expenses and other current assets 2,252 4,149
--------- ---------
Total current assets 188,212 197,425
Property and equipment, net 16,100 15,694
Excess of cost over acquired net assets, net 44,569 44,948
Other assets 550 682
Deferred income tax assets 15,139 15,139
--------- ---------
Total assets $ 264,570 $ 273,888
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $71,424 $68,521
Accrued compensation and withholdings 3,383 4,661
Other accrued liabilities and expenses 19,611 23,148
Current portion of capital lease obligations and other debt 3,340 3,575
--------- ---------
Total current liabilities 97,758 99,905
Long-term liabilities:
Debt 90,076 95,608
Warranty reserves and other 4,145 3,675
--------- ---------
Total long-term liabilities 94,221 99,283
Excess of acquired net assets over cost, net 3,851 4,160
Shareholders' equity:
Class A Common stock, $.01 par value-authorized 40,000
shares; 5,357 and 5,226 shares issued and outstanding at
May 31, 1999 and February 28, 1999, respectively, 54 53
Class B Common stock, $.01 par value-authorized 20,000
shares; 3,831 and 3,831 shares issued and outstanding at
May 31, 1999 and February 28, 1999, respectively 38 38
Capital in excess of par value 39,346 38,965
Retained earnings 30,451 31,884
--------- ---------
69,889 70,940
Note receivable from shareholder (400) (400)
Deferred compensation cost (749) ---
Total shareholders' equity 68,740 70,540
--------- ---------
Total liabilities and shareholders' equity $ 264,570 $ 273,888
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
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PAMECO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
THREE MONTHS ENDED
MAY 31
---------------------------
1999 1998
----------- ----------
Net sales $ 159,117 $ 145,194
Costs and expenses:
Cost of products sold 121,915 111,146
Warehousing, selling, and 37,126 29,519
administrative expenses
Amortization of excess of cost over
acquired net assets 292 204
Amortization of excess of acquired (309) (306)
net assets over cost -------- --------
159,024 140,563
-------- --------
Operating earnings 93 4,631
Other expenses:
Interest expense, net (1,779) (1,022)
Discount on sale of accounts
receivable and other expenses (814) (760)
-------- --------
(Loss) income before income taxes (2,500) 2,849
(Benefit) provision for income taxes (1,067) 965
-------- --------
Net (loss) income $ (1,433) $ 1,884
======== ========
Basic (loss) earnings per share $ (0.16) $ 0.22
======== ========
Basic weighted average shares outstanding 9,092 8,740
======== ========
Diluted (loss) earnings per share $ (0.16) $ 0.21
======== ========
Diluted weighted average shares outstanding 9,092 9,120
======== ========
See notes to condensed consolidated financial statements.
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PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
May 31
-----------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (1,433) $ 1,884
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Amortization of excess of cost over acquired net assets 292 204
Amortization of excess of acquired net assets over cost (309) (306)
Depreciation 798 485
Loss (gain) on sale of property and equipment 40 (40)
Changes in operating assets and liabilities net of assets
acquired and liabilities assumed:
Accounts receivable (129) 4,423
Inventories, prepaid expenses and other assets 9,560 (5,034)
Accounts payable and accrued liabilities (1,443) (1,029)
---------- ----------
Net cash provided by operating activities 7,376 587
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,252) (1,718)
Proceeds from sales of property and equipment 9 123
Business acquisitions --- (10,428)
---------- ----------
Net cash used in investing activities (1,243) (12,023)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on working capital facility 120,875 167,397
Repayments on working capital facility (125,594) (186,164)
Borrowings on term debt --- 30,000
Repayments on term debt (813) ---
Payments on capital lease obligations and other debt (234) (26)
Proceeds from exercise of stock options and warrants 381 239
Deferred compensation costs (749) ---
---------- ----------
Net cash (used in) provided by financing activities (6,134) 11,446
---------- ----------
Net (decrease) increase in cash and cash equivalents (1) 10
---------- ----------
Cash and cash equivalents at beginning of period 148 142
---------- ----------
Cash and cash equivalents at end of period $ 147 $ 152
========== ==========
</TABLE>
See notes to consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
May 31, 1999
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 month period ended May 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending February
29, 2000. 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 28,1999.
The balance sheet at February 28, 1999 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.
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3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands,
except per share amounts).
THREE MONTHS ENDED
MAY 31,
1999 1998
----------- -----------
Numerator:
Net (loss) income applicable to common
shareholders $ (1,433) $ 1,884
======= =======
Denominator:
Denominator for basic earnings per share- 9,092 8,740
weighted average shares
Effect of dilutive securities:
Stock Options --- 380
Denominator for diluted earnings per share- ------- --------
adjusted weighted-average shares and assumed
conversions 9,092 9,120
======= =======
Basic (loss) earnings per share $ (0.16) $ 0.22
======= =======
Diluted (loss) earnings per share $ (0.16) $ 0.21
======= =======
The computation of diluted weighted average shares for the three months
ended May 31, 1998 excludes 175,000 shares underlying stock options
that are antidulitive based on the average market price for that
period.
4. CONTINGENCIES
From time to time, the Company is involved in 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.
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 revenue for the periods indicated.
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THREE MONTHS ENDED
--------------------------------
MAY 31 MAY 31
1999 1998
----------- ----------
Net sales 100.0% 100.0%
Cost of products sold 76.6 76.5
------ ------
Gross profit 23.4 23.5
Warehousing, selling, and
administrative expenses 23.3 20.3
Amortization of excess of cost over
acquired net assets 0.2 0.1
Amortization of excess of acquired
net assets over cost (0.2) (0.2)
------ ------
Operating earnings 0.1 3.2
Other expense:
Interest expense, net 1.1 0.7
Other expense 0.5 0.5
------ ------
(Loss) income before income taxes (1.6) 2.0
(Benefit) Provision for income taxes (0.7) 0.7
------ ------
Net (loss) income (0.9)% 1.3%
====== ======
RESULTS OF OPERATIONS
Net sales of $159.1 million in the quarter ended May 31, 1999 increased
9.6% from $145.2 million for the comparable period in 1998. For the quarter,
same store daily sales decreased 3.8% as compared to the prior year. Net sales
from acquisitions provided the net sales growth in the quarter ended May 31,
1999. The decline in the same store daily sales is principally due to the
unseasonably cool weather patterns that prevailed throughout the country in
May and the discontinuance of certain product promotion programs which
emphasized revenue at the expense of gross margin.
Gross profit for the quarter ended May 31, 1999 increased 9.3% to $37.2
million from $34.0 million in the prior year as a result of the higher sales
volume. The gross profit percentage for the quarter ended May 31, 1999
decreased to 23.4% as compared to 23.5% during the same quarter in the prior
year. During the quarter, the Company recorded higher product shrinkage and
damage expenses than had been recorded in the prior year.
Warehousing, selling, and administrative expenses during the quarter
increased 25.8% to $37.1 million from $29.5 million in the prior year. The
normal operating expenses of the 22 branches acquired since the first
quarter of the prior year contributed approximately 47.1% of the additional
expense. The Company also recognized a charge related to the vesting of
certain restricted stock granted to the Company's chief executive officer.
As a percentage of net sales, warehousing, selling, and administrative
expenses increased to 23.3% in the quarter from 20.3% in the prior year.
Excluding the effect of the charge related to the grant of the restricted
stock, warehousing, selling, and administrative expenses would have
increased to 22.9% as a percentage of net sales.
Interest expense during the quarter ended May 31, 1999 increased
$757,000 to $1.8 million from $1.0 million in the previous year, resulting
from the Company's average borrowings under the Company's revolving line of
credit and two term loans increasing by $47.8 million over the previous
year. The accounts receivable securitization borrowing (the "Securitization
Program") is recorded as a sale of assets; therefore, approximately $55.7
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million of accounts receivable and debt are not reflected on the Company's
balance sheet at May 31, 1999. The discount on the sale of accounts
receivable of $723,000 and $749,000 for the three months ended May 31, 1999
and May 31, 1998, respectively, was recorded as "Other Expense" on the
statements of operations. The average rate of interest on all debt,
including the Securitization Program, for the quarter ended May 31, 1999
was 6.6%, as compared to 7.1% for the same period in the previous year.
For the quarter ended May 31, 1999, the Company recorded an income tax
benefit of $1.1 million. 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 results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from seasonal working capital
requirements, capital expenditures, interest and principal payments on
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 three
months ended May 31, 1999, cash provided by operating activities was $7.4
million as compared to $587,000 for the three months ended May 31, 1998.
Additionally, process improvements implemented by the Company have resulted
in the accounts receivable level remaining constant during a period of
increased sales. Net cash used in investing activities was $1.2 million for
the three months ended May 31, 1999 as compared to $12.0 million for the
three months ended May 31, 1998. In the three months ended May 31, 1998,
the Company acquired the HVAC operations and related assets of Keller
Supply, Inc. and George L. Johnston Co., Inc. for an aggregate cash price of
$10.4 million. Net cash used in financing activities was $6.1 million for
the three months ended May 31, 1999, while such activities provided $11.4
million in the three months ended May 31, 1998.
The Company's working capital decreased to $90.5 million at May 31,
1999 from $97.5 million at February 28, 1999.
The Company's capital expenditures, excluding acquisitions, for the
three months ended May 31, 1999, were $1.3 million as compared to $1.7
million for the previous year. Such capital expenditures were primarily for
branch and distribution center leasehold improvements, equipment, computer
equipment and supply chain software.
At May 31, 1999, the Company had a $240.0 million Credit Agreement
(the "Credit Agreement") with one primary institution and several other
participating lenders. The Credit Agreement provides for (a) the
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 facility bears 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 $100.0 million at the
beginning of the fiscal year. At May 31, 1999 and May 31, 1998, accounts
receivable of $55.7 million and $60.0 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 May 31,
1999 and May 31, 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
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Company's interest coverage ratio, and was 1.0% at May 31, 1999. The
borrowing rate at May 31, 1999 was 5.9%. The discount on the sale of
accounts receivable was $723,000 and $749,000 for the quarters ended May 31,
1999 and May 31, 1998, respectively and such amounts are included in "Other
Expenses" on the consolidated statements of operations.
At May 31, 1999, the Company had borrowings of $45.0 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 May 31, 1999. The borrowing rate at May 31, 1999 was 6.7%.
The Company had aggregate borrowings of $48.4 million outstanding at
May 31, 1999 on Tranche A and Tranche B. The Tranche A term loan matures on
March 10, 2003, and the Tranche B loan matures on March 10, 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 May
31, 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 May 31, 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 life 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 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 income
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 the
other 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.
SUBSEQUENT EVENT
On June 11, 1999, the Company entered into a Fourth Amendment and
Waiver of 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.
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Tranche A Term Loan:
On June 11, 1999, the Company made a principal payment aggregating
$15,000,0000 financed by borrowings under the 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 on 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 Term Loan:
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 on
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 rate of less than or
equal to 5.0 to 1.0 (actual at May 31, 1999 was 7.27 to 1.0), additional
interest will accrue and compound monthly against 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 existing 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.
On June 11, 1999, the Company entered into an Amendment Number Five to
its Securitization Program. This Amendment provides for interest based on
the commercial paper rate plus a margin of 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 required to meet a quarterly senior fixed charge ratio and
quarterly targets of earnings before interest, taxes, depreciation, and
amortization.
On July 14, 1999, the Company entered into a Fifth Amendment and
Waiver to the Credit Agreement and a consent and waiver to the Securitization
Program to exclude the restricted stock grant to the Company's chief
executive officer from the consolidated EBITDA calculation.
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 February 29, 2000. 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.
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.
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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 major tasks. 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 enables 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 primarily 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
$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 $175,000 to
complete the project. The Company has budgeted an additional $1,050,000 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 Revolver. 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. 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
12
<PAGE>
<PAGE>
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.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.14G Fifth Amendment and Waiver to Amended and Restated
Credit Agreement dated July 14, 1999
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On March 17, 1999, the Company filed a Form 8-K with the Commission to
report further details of its preliminary fiscal fourth quarter and year-end
outlook.
On March 31, 1999, the Company filed a Form 8-K with the Commission
regarding a one-time pre-tax charge to earnings for the year ended February
28, 1999.
On April 13, 1999, the Company filed a Form 8-K with the Commission to
report completion of the initial phase of its MIS problem identification.
On April 27, 1999, the Company filed a Form 8-K with the Commission
regarding progress on its new MIS system.
13
<PAGE>
<PAGE>
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/ Mark S. Sellers
---------------------------------------
Mark S. Sellers
Chief Financial Officer
July 15, 1999 (Mr. Sellers has been duly authorized
to sign on behalf of the registrant)
14
<PAGE>
<PAGE>
Exhibit Index
Exhibit No. Exhibit
----------- -------
10.14G Fifth Amendment and Waiver to Amended and Restated
Credit Agreement dated July 14, 1999
27. Financial Data Schedule (for SEC use only)
15
FIFTH AMENDMENT AND WAIVER
--------------------------
FIFTH AMENDMENT AND WAIVER (this "Amendment"), dated as of
---------
July __, 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 (f) of such definition:
"plus (g) for the periods ending May 31, 1999
----
through November 30, 2002, the vested amounts of
"Restricted Stock" described in the Restricted
Stock Award Agreement dated as of the 6th day of
July, 1999 by and between Pameco Corporation, a
Georgia corporation and James R. Balkcom, Jr.
3. Waiver. The Agent and the Lenders hereby waive the
------
Event of Default arising under Sections 11(c) of the Credit Agreement
caused solely by the Company's failure to comply with subsections (a),
(b), (d) and (e) of Schedule 10.8 to the Credit Agreement for the
fiscal quarter ended May 31, 1999. The foregoing waivers are limited
<PAGE>
<PAGE>
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 "Fifth
-----
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 Fifth Amendment Effective Date, and certifying 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.
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 Fifth 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.
2
<PAGE>
<PAGE>
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]
3
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and duly
authorized officers as of the day and year first above written.
PAMECO CORPORATION
By: /s/ J.R. Balkcom
Title: Chairman and CEO
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: ______________________
<PAGE>
<PAGE>
ACKNOWLEDGMENT AND CONSENT
ACKNOWLEDGMENT AND CONSENT (this "Acknowledgment and
------------------
Consent"), dated as of July __, 1999, to the documents listed on
- -------
Schedule 1 hereto (the "Documents") made by each of the signatories
---------
hereto (each a "Grantor"), in favor of GENERAL ELECTRIC CAPITAL
-------
CORPORATION, a New York corporation, as agent (in such capacity, the
"Agent") for the lenders (the "Lenders") from time to time parties to
----- -------
the Amended and Restated Credit Agreement referred to below.
W I T N E S S E T H
WHEREAS, Pameco Corporation (the "Company"), the Lenders and
-------
the Agent entered into the Amended and Restated Credit Agreement dated
as of March 10, 1998 (as previously amended, and as the same may be
further amended, restated, supplemented or otherwise modified from
time to time, the "Amended and Restated Credit Agreement"); and
-------------------------------------
WHEREAS, to secure and guarantee the obligations of the
Company under the Amended and Restated Credit Agreement, each Grantor
entered into Documents to which it is a party; and
WHEREAS, the Amended and Restated Credit Agreement was
amended on the date hereof pursuant to the Fifth Amendment and Waiver,
dated as of this date, among the Company, the Lenders and the Agent
(the "Amendment"; the Amended and Restated Credit Agreement as amended
---------
by the Amendment, the "Amended Agreement"); and
-----------------
WHEREAS, it is a condition precedent to the effectiveness of
the Amendment that each Grantor execute and deliver this Acknowledgment
and Consent to confirm that the security interests granted under the
Documents secure the Obligations of the Company under the Amended Agreement;
NOW, THEREFORE, in consideration of the premises and mutual
agreements contained herein, and for other valuable consideration, the
receipt of which is hereby acknowledged, each Grantor and the Agent
hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms
-------------
which are defined in the Amended and Restated Credit Agreement and
used herein are so used as so defined.
2. Representations and Warranties. Each Grantor
------------------------------
represents and warrants that upon the execution and delivery of this
Acknowledgment and Consent, the Documents, as acknowledged and
consented to hereby, shall constitute a valid and continuing lien on
and, to the extent provided therein, perfected security interest in,
the collateral referred to in the Documents, as acknowledged and
consented to hereby, in favor of the Agent for the ratable benefit of
the Lenders.
3. Acknowledgment and Consent. Each Grantor hereby:
--------------------------
5
<PAGE>
<PAGE>
(a) acknowledges and consents to the execution,
delivery and performance of (i) the Amendment and (ii) all of the
documents and transactions contemplated thereby;
(b) agrees that such execution, delivery and
performance shall not in any way affect such Grantor's
obligations under any Loan Document (as defined in the Amended
Agreement) to which such Grantor is a party, which obligations on
the date hereof remain absolute and unconditional and are not
subject to any defense, set-off or counterclaim; and
(c) grants to the Agent, for the ratable benefit of
the Lenders, and pursuant to the terms and conditions of the
Documents a continuing lien on and security interest in all
collateral described in the Documents as security for the
Obligations (as defined in the Amended Agreement).
4. Miscellaneous.
-------------
(a) This Acknowledgment and Consent may be executed in
any number of separate counterparts, and all of said counterparts
taken together shall constitute one and the same instrument.
Delivery of an executed counterpart of a signature page to this
Acknowledgment and Consent by telecopy shall be effective as
delivery of a manually executed counterpart of this
Acknowledgment and Consent.
(b) This Acknowledgment and Consent shall become
effective when executed by each Grantor and the Agent.
(c) THIS ACKNOWLEDGMENT AND CONSENT SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK.
[signature page follows]
6
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Acknowledgment and Consent to be executed and delivered by their
respective duly authorized officers as of the date first written
above.
PAMECO CORPORATION
By: _____________________________
Name: __________________________
Title: ___________________________
PAMECO INVESTMENT COMPANY, INC.
By: _____________________________
Name: __________________________
Title: ___________________________
<PAGE>
<PAGE>
Schedule 1 to
-------------
Acknowledgment and Consent
--------------------------
DOCUMENTS
The Company Security Agreement dated as of March 19, 1992 by
Pameco Corporation in favor of General Electric Capital Corporation,
as Agent
The Pledge Agreement dated as of April 29, 1996 by Pameco
Corporation in favor of General Electric Capital Corporation, as Agent
The Intercreditor Agreement dated as of April 29, 1996 among
Pameco Corporation, Pameco Securitization Corporation, Redwood
Receivables Corporation and General Electric Capital Corporation
The Pledge Agreement dated as of December 1, 1997 by Pameco
Corporation in favor of General Electric Capital Corporation, as Agent
The Subsidiary Guarantee dated as of December 1, 1997 by Pameco
Investment Company, Inc. in favor of General Electric Capital
Corporation, as Agent
The Subsidiary Security Agreement dated as of December 1, 1997 by
Pameco Investment Company, Inc. in favor of General Electric Capital
Corporation, as Agent
The Trademark Security Agreement dated as of December 1, 1997 by
Pameco Investment Company, Inc. in favor of General Electric Capital
Corporation, as Agent
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PAMECO CORPORATION FOR THE YEAR ENDED MAY 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 147
<SECURITIES> 0
<RECEIVABLES> 41,676
<ALLOWANCES> 6,094
<INVENTORY> 150,230
<CURRENT-ASSETS> 188,212
<PP&E> 25,022
<DEPRECIATION> 8,923
<TOTAL-ASSETS> 264,570
<CURRENT-LIABILITIES> 97,758
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 264,570
<SALES> 159,117
<TOTAL-REVENUES> 159,117
<CGS> 121,915
<TOTAL-COSTS> 159,024
<OTHER-EXPENSES> 814
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,779
<INCOME-PRETAX> (2,500)
<INCOME-TAX> (1,067)
<INCOME-CONTINUING> (1,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
