<PAGE>
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, 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, 5,560,432 shares and Class B Common Stock, $.01 par value, 3,648,958
shares, both as of September 30, 1999.
<PAGE>
PAMECO CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-August 31, 1999
and February 28, 1999 3
Condensed Consolidated Statements of Operations-Three
Months ended August 31, 1999 and 1998 4
Condensed Consolidated Statements of Operations-Six
Months ended August 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows-Six
Months ended August 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 7
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 13
SIGNATURES
2
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PAMECO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
August 31, February 28,
1999 1999
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 137 $ 148
Accounts receivable, less allowance of $6,202 at August 31, 1999
and $6,210 at February 28, 1999 35,056 35,507
Inventories, net 128,736 157,621
Prepaid expenses and other current assets 952 4,149
-------------- -------------
Total current assets 164,881 197,425
Property and equipment, net 16,584 15,694
Excess of cost over acquired net assets, net 45,255 44,948
Other assets 697 682
Deferred income tax assets 15,139 15,139
-------------- -------------
Total assets $242,556 $273,888
============== =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 56,536 $ 68,521
Accrued compensation and withholdings 4,543 4,661
Other accrued liabilities and expenses 22,546 23,148
Current portion of debt 3,258 3,575
-------------- -------------
Total current liabilities 86,883 99,905
Long-term liabilities:
Debt 77,201 95,608
Warranty reserves and other 5,944 3,675
-------------- -------------
Total long-term liabilities 83,145 99,283
Excess of acquired net assets over cost, net 4,198 4,160
Shareholders' equity:
Class A Common stock, $.01 par value-authorized 40,000 shares; 5,560 and 5,226
shares issued and outstanding at August 31, 1999 and February 28, 1999, 56 52
respectively
Class B Common stock, $.01 par value-authorized 20,000 shares; 3,649 and 3,831
shares issued and outstanding at August 31, 1999 and February 28, 1999, 37 38
respectively
Capital in excess of par value 39,349 38,966
Retained earnings 29,864 31,884
-------------- -------------
69,306 70,940
Note receivable from shareholder (400) (400)
Deferred compensation cost (576) ---
-------------- -------------
Total shareholders' equity 68,330 70,540
-------------- -------------
Total liabilities and shareholders' equity $242,556 $273,888
============== =============
</TABLE>
See notes to condensed consolidated financial statements.
3
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PAMECO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31 August 31
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 207,724 $ 210,293 $ 366,841 $ 355,487
Costs and expenses:
Cost of products sold 163,740 159,810 285,655 270,956
Warehousing, selling, and administrative expenses 38,884 35,106 76,010 64,626
Severance 471 --- 471 ---
Restructuring 2,831 --- 2,831 ---
Amortization of excess of cost over acquired net assets 282 206 574 410
Amortization of excess of acquired net assets over cost (306) (306) (615) (612)
------------ ------------ ------------ ------------
205,902 194,816 364,926 335,380
------------ ------------ ------------ ------------
Operating earnings 1,822 15,477 1,915 20,107
Other expenses:
Interest expense, net (1,792) (1,286) (3,571) (2,308)
Discount on sale of accounts receivable and other expenses (1,163) (978) (1,977) (1,738)
------------ ------------ ------------ ------------
(Loss) income before income taxes (1,133) 13,213 (3,633) 16,061
(Benefit) provision for income taxes (546) 4,905 (1,613) 5,870
------------ ------------ ------------ ------------
Net (loss) income $ (587) $ 8,308 $ (2,020) $ 10,191
============ ============ ============ ============
Basic (loss) earnings per share $ (0.06) $ 0.95 $ (0.22) $ 1.16
============ ============ ============ ============
Basic weighted average shares outstanding 9,201 8,782 9,147 8,761
============ ============ ============ ============
Diluted (loss) earnings per share $ (0.06) $ 0.91 $ (0.22) $ 1.11
============ ============ ============ ============
Diluted weighted average shares outstanding 9,201 9,180 9,147 9,143
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
August 31
------------------------------------
1999 1998
-------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income $ (2,020) $ 10,191
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Amortization of excess of cost over acquired net assets 574 410
Amortization of excess of acquired net assets over cost (615) (612)
Depreciation 1,688 993
Loss (gain) on sale of property and equipment 40 (19)
Deferred compensation costs (576) --
Changes in operating assets and liabilities net of assets
acquired and liabilities assumed:
Accounts receivable 451 (6,945)
Inventories, prepaid expenses and other assets 31,844 (10,917)
Accounts payable and accrued liabilities (10,436) 6,829
-------------- -----------
Net cash provided by (used in ) operating activities 20,950 (70)
Cash flows from investing activities
Purchases of property and equipment (2,641) (4,132)
Proceeds from sales of property and equipment 23 154
Business acquisitions -- (32,902)
-------------- -----------
Net cash used in investing activities (2,618) (36,880)
Cash flows from financing activities
Borrowings on working capital facility 205,437 400,262
Repayments on working capital facility (207,289) (393,273)
Borrowings on term debt -- 30,000
Repayments on term debt (16,624) (538)
Payments on capital lease obligations and other debt (248) (53)
Proceeds from exercise of stock options and warrants 381 551
-------------- -----------
Net cash (used in) provided by financing activities (18,343) 36,949
-------------- -----------
Net decrease in cash and cash equivalents (11) (1)
Cash and cash equivalents at beginning of period 148 142
-------------- -----------
Cash and cash equivalents at end of period $ 137 $ 141
============== ===========
</TABLE>
See notes to consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
August 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 and six month periods ended
August 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.
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,
1999 1998 1999 1998
------ ------ -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net (loss) income applicable to common shareholders (587) 8,308 (2,020) 10,191
====== ====== ======== ========
Denominator:
Denominator for basic earnings per share-weighted average shares 9,201 8,782 9,147 8,761
Effect of dilutive securities:
Stock Options -- 398 -- 382
------ ------ -------- --------
Denominator for diluted earnings per share-adjusted weighted-
average shares and assumed conversions 9,201 9,180 9,147 9,143
====== ====== ======== ========
Basic (loss) earnings per share $(0.06) $ 0.95 $ (0.22) $ 1.16
====== ====== ======== ========
Diluted (loss) earnings per share $(0.06) $ 0.91 $ (0.22) $ 1.11
====== ====== ======== ========
</TABLE>
6
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The computation of diluted weighted average shares for the three and six
months ended August 31, 1999 excludes 950,594 shares underlying stock
options that are antidulitive based on the average market price for that
period and also as the Company is reporting a loss. The computation of
diluted weighted average shares for the six months ended August 31, 1998
excludes 470,000 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 operations data to net revenue for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- ---------------------------
August 31 August 31 August 31 August 31
1999 1998 1999 1998
----------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0%
Cost of products sold 78.8 76.0 77.9 76.2
----------- ------------ --------- ----------
Gross profit 21.2 24.0 22.1 23.8
Warehousing, selling, and administrative expenses 18.7 16.7 20.7 18.2
Severance 0.2 - 0.1 -
Restructuring 1.4 - 0.8 -
Amortization of excess of cost over acquired net assets 0.1 0.1 0.2 0.1
Amortization of excess of acquired net assets over cost (0.1) (0.1) (0.2) (0.2)
----------- ------------ --------- ----------
Operating earnings 0.9 7.4 0.5 5.7
Other expense:
Interest expense, net 0.9 0.6 1.0 0.6
Other expense 0.6 0.5 0.4 0.5
----------- ------------ --------- ----------
(Loss) income before income taxes (0.5) 6.3 (1.0) 4.5
(Benefit) Provision for income taxes (0.2) 2.3 (0.5) 1.7
----------- ------------ --------- ----------
Net(loss) income (0.3)% 4.0 % (0.6)% 2.9%
=========== ============ ========= ==========
</TABLE>
RESULTS OF OPERATIONS
QUARTER ENDED AUGUST 31, 1999 VS QUARTER ENDED AUGUST 31, 1998
Net sales for the quarter ended August 31, 1999 decreased 1.2% to $207.7
million from $210.3 million for the same period in 1998. Second quarter
same store daily net sales decreased 7.6%, segmented as follows: (i) 9.2%
decrease in net sales of HVAC products, and (ii) 5.3% decrease in net sales
of refrigeration equipment, parts, and supplies, as compared to the same
period in 1998. Net sales were adversely impacted by: (i) supply chain
issues and (ii) the discontinuance of certain promotional programs that
emphasized revenue at the expense of gross margin.
7
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Gross profit for the quarter ended August 31, 1999 decreased 12.9% to $44.0
million from $50.5 million for the same period in 1998. The gross profit
percentage for the quarter ended August 31, 1999 decreased to 21.2% from
24.0% for the same period in 1998. The lower gross profit percentage is
primarily due to the write down of excess and idle inventory, and the reduction
of anticipated benefits from vendor rebate programs to reflect the Company's
lower than anticipated purchasing levels. Without the effect of these
adjustments, the gross profit percentage would have been 23.3% for the three
months ended August 31, 1999.
Warehousing, selling, and administrative expenses during the quarter increased
10.9% to $38.9 million from $35.1 million for the same period in 1998. The
normal operating expenses of the 32 branches acquired since the same period in
1998 contributed approximately 53.5% of the additional expense, 7.5% was related
to the vesting of certain restricted stock granted to the Company's current
chief executive officer, and the remainder is primarily attributable to the
costs associated with the Company's objective of enhancing its key business
processes.
For the quarter ended August 31, 1999, the Company recorded a $2.8 million
restructuring charge for costs relating to the closing or combining of branch
locations. The charge also included a write off of the portion of goodwill
related to acquired branches that have been scheduled for closure.
For the quarter ended August 31, 1999, the Company recorded charges of $471,000
related to severance payments to be paid to several of the Company's former
executives.
Interest expense, net for the second quarter ended August 31, 1999 increased
$506,000 to $1.8 million from $1.3 million for the same period in 1998,
primarily due to higher interest rates. The accounts receivable securitization
borrowing (the "Securitization Program") is recorded as a sale of assets;
therefore, approximately $64.5 million of accounts receivable and debt are not
reflected on the Company's balance sheet at August 31, 1999. The discount on
the sale of accounts receivable of $1.1 million and $1.0 million for the quarter
ended August 31, 1999 and August 31, 1998, respectively, was recorded as "Other
Expense" on the consolidated statements of operations.
For the quarter ended August 31, 1999, the Company recorded an income tax
benefit of $546,000. The Company's effective tax rate differed from the
statutory rate principally as a result of the amortization of the excess of
acquired net assets over cost (negative goodwill amortization) not being
included in taxable income.
SIX MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998
Net sales for the six months ended August 31, 1999 increased 3.2% to $366.8
million from $355.5 million for the same period in 1998. For the six months,
same store daily net sales decreased 5.6%, segmented as follows: (i) 5.9%
decrease in net sales of HVAC products, and (ii) 5.3% decrease in net sales of
refrigeration equipment, parts, and supplies, as compared to the same period in
1998. Net sales were adversely impacted by: (i) supply chain issues and (ii) the
discontinuance of certain promotional programs that emphasized revenue at the
expense of gross margin.
Gross profit for the six months ended August 31, 1999 decreased 4.0% to $81.2
million from $84.5 million for the same period in 1998. The gross profit
percentage for the six months ended August 31, 1999 decreased to 22.1% from
23.8% for the same period in 1998. The lower gross profit percentage is
primarily due to: (i) the write down of excess and idle inventory, and (ii) the
reduction of anticipated benefits from vendor rebate programs to reflect the
Company's lower than anticipated purchasing levels. Without the effect of these
adjustments, the gross profit percentage would have been 23.3% for the six
months ended August 31, 1999.
Warehousing, selling, and administrative expenses for the six months ended
August 31, 1999 increased 17.6% to $76.0 million from $64.6 million for the
same period in 1998. The normal operating expenses of the 32 branches acquired
since the same period in 1998 contributed approximately 56.8% of the additional
expense, and the remainder is primarily attributable to the costs associated
with the Company's objective of enhancing its key business processes.
8
<PAGE>
For the six months ended August 31, 1999, the Company recorded a $2.8 million
restructuring charge for costs relating to the closing or combining of branch
locations. The charge also included a write down of the portion of goodwill
related to acquired branches that have been scheduled for closure.
For the six months ended August 31, 1999, the Company recorded charges of
$471,000 related to severance payments to be paid to several of the Company's
former executives.
Interest expense, net for the six months ended August 31, 1999 increased $1.3
million to $3.6 million from $2.3 million for the same period in 1998, primarily
due to higher interest rates. The accounts receivable securitization borrowing
(the "Securitization Program") is recorded as a sale of assets; therefore,
approximately $64.5 million of accounts receivable and debt are not reflected on
the Company's balance sheet at August 31, 1999. The discount on the sale of
accounts receivable of $1.9 million and $1.8 million for the six months ended
August 31, 1999 and August 31, 1998, respectively, was recorded as "Other
Expense" on the statements of operations.
For the six months ended August 31, 1999, the Company recorded an income
tax benefit of $1.6 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 income.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to aggressively manage working capital and debt,
reducing inventory by $28.9 million, accounts payable by $12.8 million, and
total debt by $22.9 million since February 28, 1999. The benefit of aggressive
working capital management has been partially offset by the Company's current
asset based financing structure. The Company's debt capacity is adversely
affected by the reduction of inventory.
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, 1999, cash
provided by operating activities was $21.0 million as compared to $70,000 used
in operating activities for the six months ended August 31, 1998. Net cash used
in investing activities was $2.6 million for the six months ended August 31,
1999 as compared to $36.9 million for the six months ended August 31, 1998. In
the six months ended August 31, 1998, the Company acquired 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. Net cash used in financing activities was $18.3 million for the six
months ended August 31, 1999, while such activities provided $36.9 million in
the six months ended August 31, 1998.
The Company's working capital decreased to $78.0 million at August 31, 1999
from $97.5 million at February 28, 1999.
The Company's capital expenditures, excluding acquisitions, for the six
months ended August 31, 1999, were $2.6 million as compared to $4.1 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 August 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 at a prime rate based or Eurodollar based
interest 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 Securitization Program
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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 August 31, 1999 and August 31, 1998, accounts receivable of
$64.5 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 August 31, 1999 and August 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 was 1.75% at August 31,
1999. The borrowing rate at August 31, 1999 was 5.15%. The discount on the sale
of accounts receivable was $1.1 million and $1.0 million for the quarters ended
August 31, 1999 and August 31, 1998, respectively and such amounts are included
in "Other Expenses" on the consolidated statements of operations. The discount
on the sale of accounts receivable was $1.9 million and $1.8 million for the six
months ended August 31, 1999 and August 31, 1998, respectively and such amounts
are included in "Other Expenses" on the consolidated statements of operations.
On June 11, 1999, the Company entered into a Fourth Amendment and Waiver of
the Credit Agreement (the "Fourth Amendment"). In general, the Fourth 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 Fourth 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 based interest rate for these loans has been changed from 2.00 %
to 2.50%. The borrowing base for the Revolver was reduced by a new reserve equal
to $7,750,000 at August 31, 1999 and is equal to the outstanding balance of the
Tranche A term loan during each succeeding month.
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 based interest 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 based interest 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, 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
10
<PAGE>
time shall be less than $20,000,000. The warrants expire ten years from issuance
and have "piggyback" and demand registration rights.
At August 31, 1999, the Company had borrowings of $47.8 million outstanding
under the Revolver. These borrowings are due August 6, 2003. The margin on the
Eurodollar rate for the Revolver was 2.5% at August 31, 1999. The borrowing rate
at August 31, 1999 was 5.33%.
The Company had aggregate borrowings of $32.6 million outstanding at August
31, 1999 on Tranche A and Tranche B. The Tranche A term loan matures on
September 30, 2001 and the Tranche B loan matures on June 30, 2001. The margin
on the Eurodollar rate for the Tranche A was 3.0% at August 31, 1999. The margin
on the Eurodollar rate for the Tranche B was 4.5% at August 31, 1999.
In connection with the Fourth 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 of
the Credit Agreement which allowed the Company to add back certain amounts to
the Company's earnings for financial covenant compliance purposes.
On August 25, 1999, the Company entered into a Sixth Amendment and Waiver
of the Credit Agreement and an Amendment No. 6 to Securitization Agreements.
These amendments lowered certain of the financial covenants applicable to
the Credit Agreement and the Securitization Program.
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 October 20, 1999, the Company entered into a Seventh Amendment and
Waiver of the Credit Agreement and an Amendment No. 7 to Securitization
Agreements. These amendments require that the Company deliver daily borrowing
base reports to the lenders under the Credit Agreement and that the Company
deliver daily investment base reports to Redwood's operating agent under the
Securitization Program. The amendment of the Credit Agreement also restricts the
Company to prime rate-based interest rates for future borrowings and for
maturing eurodollar-based interest rate borrowings and requires that interest on
the prime rate-based borrowings be payable monthly in arrears. These amendments
also shorten or eliminate certain of the time periods previously available to
the Company to cure certain types of defaults (in the case of the Credit
Agreement) or termination events (in the case of the Securitization Program).
These amendments also require that the Company certify on a daily basis to its
compliance with the requirements of the Credit Agreement and the Securitization
Program and provide its lenders and Redwood's operating agent with certain daily
reports with respect to its inventory and accounts receivable, respectively.
These amendments also require that the Company release the lenders under the
Credit Agreement and Redwood and its agents under the Securitization Program
from any and all liabilities, claims, suits, debts, causes of action and the
like which the Company may have or claim to have against any such person arising
on or prior to the date of these amendments. The amendment of the Securitization
Program also eliminates the requirement that Redwood's operating agent give the
Company 30 days prior notice of such operating agent's imposition of other
criteria and requirements for the eligibility of receivables to be included in
the investment base for the Securitization Program. The amendment of the
Securitization Program also requires that the Company cure on a same-day basis
any purchase excess condition which may exist under the Securitization Program
(previously the Company was required to cure such condition by the next business
day). The amendment of the Securitization Program also requires that at least
one of PSC's independent directors be a representative of a nationally-
recognized independent firm acceptable to Redwood's operating agent. In
connection with the amendment of the Securitization Program, the Company and PSC
also agreed that Redwood has the option, upon 5 business days' prior notice, to
put to PSC all of the receivables transferred under the Securitization Program
at a purchase price equal to 100% of Redwood's capital investment in such
receivables plus the accrued yield on such investment and any breakage costs
payable under the Securitization Program. PSC's put obligation is contingent
upon PSC obtaining financing on terms no less favorable to PSC than those under
the Credit Agreement.
Management cannot assure 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, if the Company is able to refinance or further amend
the Credit Agreement on or before February 29, 2000, management believes the
Company should be able to fund its operations after such date.
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 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 surveyed its largest customers and most
critical suppliers. Moreover, the most critical suppliers were contacted
individually to determine their Year 2000 compliancy status. 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. Phase III, Conversion and System Training was
completed with the implementation of the new enterprise software and the
completion of POS system upgrades at the end of September 1999. In the final
phase, Phase IV, Year 2000 Simulation and Deployment, the Company performed
simulation testing to confirm that all production systems will be compliant into
the next millennium. As of this date, the Company has completed its simulation
testing. The Company has not discovered any significant issues.
By replacing the supply chain and financial management systems and
software, the Company has positioned itself to respond more efficiently to the
needs of its customers. The Company believes that the new system is Year 2000
compliant. 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 primarily 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 budgeted $448,000 for the
replacement and upgrading of POS hardware and software. This project was
completed at a cost of $308,000, under budget by $140,000. The Company also
budgeted $1,050,000 to replace non-compliant telephone systems, security
systems, and office equipment. However, upon detailed analysis, the Company
believes that the actual cost for such replacements will be approximately
$50,000, or approximately $1,000,000 under budget. 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 is 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 has developed 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 has developed procedures to process
transactions manually in the event of the loss of power at any of its locations.
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
12
<PAGE>
Item 1. Legal Proceedings
See Note 4 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 shareholders' meeting on June 30, 1999.
The following individuals were elected to the Company's Board of
Directors.
For Withheld
--------- --------
Class A
-------
Richard Bearse 3,528,916 38,151
Philip M. Pfeffer 3,528,741 38,326
Class B
-------
James R. Balkcom 3,297,297 0
Willem F.P. De Vogel 3,297,297 0
Earl Dolive 3,297,297 0
The shareholders ratified the Company's 1999 Stock Award Plan.
Voting For 2,742,613 Voting Against 821,410 Abstaining 3,044
The shareholders approved the Chairman Compensation Plan.
Voting For 3,511,130 Voting Against 53,295 Abstaining 2,642
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On July 14, 1999, the Company filed a Form 8-K with the Commission to
announce its operating results for the fiscal quarter ended May 31,
1999, the launch of a new web site, and the appointment of certain
personnel. Such filing included the Company's unaudited balance sheet
as of May 31, 1999 and statement of operations for the three months
ended May 31, 1999.
13
<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
October 20, 1999 (Mr. Sellers has been duly authorized
to sign on behalf of the registrant)
14
<PAGE>
Exhibit Index
Exhibit No. Exhibit
----------- -------
27. Financial Data Schedule (for SEC use only)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PAMECO CORPORATION FOR THE YEAR ENDED AUGUST 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 137
<SECURITIES> 0
<RECEIVABLES> 41,258
<ALLOWANCES> 6,202
<INVENTORY> 128,736
<CURRENT-ASSETS> 164,881
<PP&E> 26,121
<DEPRECIATION> 9,537
<TOTAL-ASSETS> 242,556
<CURRENT-LIABILITIES> 86,883
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 242,556
<SALES> 207,724
<TOTAL-REVENUES> 207,724
<CGS> 163,740
<TOTAL-COSTS> 205,902
<OTHER-EXPENSES> 1,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,792
<INCOME-PRETAX> (1,133)
<INCOME-TAX> (546)
<INCOME-CONTINUING> (587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
