<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(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, 2000 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)
<TABLE>
<CAPTION>
Georgia 51-0287654
<S> <C>
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
</TABLE>
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,
7,366,742 shares and Class B Common Stock, $.01 par value 1,872,929 shares,
both as of June 30, 2000.
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<PAGE>
PAMECO CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<C> <S> <C>
Item 1. Financial Statements (Unaudited) Condensed Consolidated
Balance Sheets--May 31, 2000 and February 29, 2000........ 3
Condensed Consolidated Statements of Operations--Three
Months ended May 31, 2000 and May 31, 1999................ 4
Condensed Consolidated Statements of Cash Flow--Three
Months ended May 31, 2000 and May 31, 1999................ 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......................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....... 10
Item 6. Exhibits and Reports on Form 8-K.......................... 10
<CAPTION>
SIGNATURES................................................................ 11
</TABLE>
2
<PAGE>
PAMECO CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
May 31, February 29,
2000 2000
-------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 116 $ 120
Accounts receivable, less allowance of $6,366 at May
31, 2000 and $5,991 at February 29, 2000............ 69,513 59,769
Inventories.......................................... 119,662 96,619
Prepaid expenses and other current assets............ 3,240 3,362
-------- --------
Total current assets............................... 192,531 159,870
Property and equipment, net............................ 14,222 15,046
Excess of cost over acquired net assets, net........... 42,585 43,221
Debt financing costs................................... 3,609 3,657
Other assets........................................... 730 735
-------- --------
Total assets....................................... $253,677 $222,529
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable..................................... $ 77,905 $ 58,116
Accrued compensation and withholdings................ 5,940 5,201
Other accrued liabilities and expenses............... 15,948 16,355
Current portion of other debt........................ 50 50
-------- --------
Total current liabilities.......................... 99,843 79,722
Long-term liabilities:
Debt................................................. 98,092 80,392
Warranty reserves and other.......................... 4,863 4,785
-------- --------
Total long-term liabilities........................ 102,955 85,177
Excess of acquired net assets over cost, net........... 2,930 3,245
Redeemable convertible preferred stock, $1.00 par
value: 600 shares authorized as of May 31, 2000, and
February 29, 2000, respectively; 140 issued and
outstanding as of May 31, 2000, and February 29, 2000,
respectively; aggregate liquidation preference of
$36,225 as of May 31, 2000 and $35,000 as of February
29, 2000, respectively................................ 25,027 23,324
Warrants to purchase redeemable convertible preferred
stock................................................. 11,676 11,676
Shareholders' equity:
Class A Common stock, $.01 par value-authorized
40,000 shares; 7,367 and 5,959 shares issued and
outstanding at May 31, 2000 and February 29, 2000,
respectively........................................ 74 59
Class B Common stock, $.01 par value-authorized
20,000 shares; 1,873 and 3,273 shares issued and
outstanding at May 31, 2000 and February 29, 2000,
respectively........................................ 18 33
Capital in excess of par value....................... 41,334 41,312
Unamortized deferred compensation.................... (236) (299)
Retained earnings (accumulated deficit).............. (29,944) (21,720)
-------- --------
Total shareholders' equity......................... 11,246 19,385
-------- --------
Total liabilities and shareholders' equity......... $253,677 $222,529
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended May 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales................................................. $125,414 $159,117
Costs and expenses:
Cost of products sold................................... 96,683 121,915
Warehousing, selling, and administrative expenses....... 32,379 37,126
Amortization of excess of cost over acquired net
assets................................................. 636 292
Amortization of excess of acquired net assets over
cost................................................... (315) (309)
-------- --------
129,383 159,024
-------- --------
Operating (loss) earnings................................. (3,969) 93
Other expense:
Interest expense, net................................... (2,236) (1,779)
Discount on sale of accounts receivable and other
expense................................................ (316) (814)
-------- --------
Loss before income taxes.................................. (6,521) (2,500)
Benefit for income taxes.................................. -- (1,067)
-------- --------
Net loss.................................................. (6,521) (1,433)
Preferred stock dividends and accretion of redeemable
convertible preferred stock.............................. (1,703) --
-------- --------
Net loss applicable to common shareholders................ $ (8,224) $ (1,433)
======== ========
Basic loss per share...................................... $ (0.71) $ (0.16)
======== ========
Basic loss applicable to common shareholders per share.... $ (0.89) $ (0.16)
======== ========
Basic weighted average shares outstanding................. 9,236 9,092
======== ========
Diluted loss per share.................................... $ (0.71) $ (0.16)
======== ========
Diluted loss applicable to common shareholders per share.. $ (0.89) $ (0.16)
======== ========
Diluted weighted average shares outstanding............... 9,236 9,092
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PAMECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities $ (6,521) $ (1,433)
Net loss..................................................
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Amortization of excess of acquired net assets over
cost................................................... (315) (309)
Amortization of excess of cost over acquired net
assets................................................. 636 292
Depreciation............................................ 975 798
Amortization of deferred financing costs................ 190 --
Loss on sale of property and equipment.................. 140 40
Amortization of deferred compensation for vested
restricted stock....................................... 63 (749)
Changes in operating assets and liabilities net of
assets acquired and liabilities assumed:
Accounts receivable................................... (9,744) (129)
Inventories, prepaid expenses and other assets........ (22,916) 9,560
Accounts payable and accrued liabilities.............. 20,199 (1,443)
--------- --------
Net cash (used in) provided by operating activities....... (17,293) 6,627
Cash flows from investing activities
Purchases of property and equipment....................... (297) (1,252)
Proceeds from sales of property and equipment............. 6 9
--------- --------
Net cash used in investing activities..................... (291) (1,243)
Cash flows from financing activities
Net repayments on working capital facility................ -- (4,719)
Net repayments on term debt............................... -- (813)
Payments on other debt.................................... -- (234)
Net borrowings on new credit agreement.................... 17,700 --
Debt issue costs paid for new credit agreement............ (142) --
Proceeds from exercise of stock options and employee stock
purchase plan............................................ 22 381
--------- --------
Net cash provided by (used in) financing activities....... 17,580 (5,385)
--------- --------
Net decrease in cash and cash equivalents................. (4) (1)
Cash and cash equivalents at beginning of year............ 120 148
--------- --------
Cash and cash equivalents at end of year.................. $ 116 $ 147
========= ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
May 31, 2000
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 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, 2000, are not necessarily indicative of the results that may be
expected for the year ending February 28, 2001. 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 29, 2000.
The balance sheet at February 29, 2000 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 May 31,
----------------
2000 1999
------- -------
<S> <C> <C>
Numerator:
Net loss................................................. $(6,521) $(1,433)
======= =======
Net loss applicable to common shareholders............... $(8,224) $(1,433)
======= =======
Denominator:
Denominator for basic earnings per share-weighted average
shares.................................................. 9,236 9,092
Effect of dilutive securities:
Employee Stock Options................................. -- --
Series A Preferred Stock............................... -- --
Warrants for Series A Preferred Stock.................. -- --
------- -------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions......... 9,236 9,092
======= =======
Basic loss per share..................................... $ (0.71) $ (0.16)
======= =======
Basic loss applicable to common shareholders per share... $ (0.89) $ (0.16)
======= =======
Diluted loss per share................................... $ (0.71) $ (0.16)
======= =======
Diluted loss applicable to common shareholders per
share................................................... $ (0.89) $ (0.16)
======= =======
</TABLE>
6
<PAGE>
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.
5. RESTRUCTURING
During the years ended February 28, 1999 and February 29, 2000, the Company
performed extensive reviews of its unprofitable branches. The Company
determined that 56 branches should be closed based on either of the following
criteria: (1) the branch location was already in a market sufficiently
serviced by a Pameco branch or (2) the branch location was in an area with
limited demand. From the period June 1, 1999, to May 31, 2000, the Company
closed 39 of these 56 branches. Since the Company had previously closed 11
branches in the quarter ended May 31, 1999, it has now closed 50 of the
branches identified in the restructuring charges. The remaining branch
closings should be completed by August 31, 2000. By closing or consolidating
branches in these markets, the Company seeks to reduce its inventory levels
and operating expenses. The Company does not expect the demographics of these
markets to change significantly enough within the next several years for these
branches to become profitable.
In connection with the closure and the consolidation of these 56 branches,
the Company recorded $4.5 million of restructuring charges. The charges
consisted of the following components: (1) lease and other facility expenses
of $2.3 million; (2) the write off of $584,000 of fixed assets no longer in
use; (3) severance payments of $187,000; and (4) an asset impairment charge of
$1.4 million for the write off of goodwill associated with certain branches to
be closed.
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 sales for the periods indicated.
<TABLE>
<CAPTION>
Three
Months
Ended
May 31,
-------------
2000 1999
----- -----
<S> <C> <C>
Net sales.................................................. 100.0% 100.0%
Cost of products sold.................................... 77.1 76.6
----- -----
Gross profit............................................... 22.9 23.4
Warehousing, selling, and administrative expenses........ 25.8 23.3
Amortization of excess of cost over acquired net assets.. 0.5 0.2
Amortization of excess of acquired net assets over cost.. (0.3) (0.2)
----- -----
Operating (loss) earnings.................................. (3.1) 0.1
Other expense:
Interest expense, net.................................... 1.8 1.1
Discount on sale of accounts receivable and other
expense................................................. 0.3 0.5
----- -----
Loss before income taxes................................... (5.2) (1.6)
Benefit for income taxes................................... -- (0.7)
----- -----
Net loss................................................... (5.2)% (0.9)%
===== =====
</TABLE>
7
<PAGE>
RESULTS OF OPERATIONS
Quarter Ended May 31, 2000 and Quarter Ended May 31, 1999
Net sales for the quarter ended May 31, 2000, decreased 21.2% to $125.4
million from $159.1 million for the same period in 1999. From the period June
1, 1999 to May 31, 2000, the Company closed 54 branches. Please note that only
39 branch closings are part of the restructuring charges described above. For
the quarter ended May 31,1999, these 54 branches provided $11.6 million in net
sales revenue. First quarter same store net sales decreased $21.7 million, a
decline of 17.5%, as compared to the same period in 1999. Same store sales
were negatively impacted by inadequate levels of inventory at the start of the
quarter and the ongoing effects of the restructuring effort.
Gross profit for the quarter ended May 31, 2000, decreased 22.8% to $28.7
million from $37.2 million for the same period in 1999. The decline in gross
profit is directly related to the decline in net sales explained above. The
gross profit percentage for the quarter ended May 31, 2000, decreased to 22.9%
from 23.4% for the same period in 1999.
Warehousing, selling, and administrative expenses for the quarter ended May
31, 2000, decreased 12.7% to $32.4 million from $37.1 million for the same
period in 1999. In the quarter ended May 31, 2000, the Company reduced its
personnel related expenses by $3.7 million as compared to the same period in
the prior year. As a result of the aforementioned closure of 54 branches, non-
personnel related warehousing, selling, and administrative expenses were
reduced by an additional $1.2 million. All other warehousing, selling, and
administrative expenses increased by $200,000 for the quarter ended May 31,
2000 as compared to the prior year.
Net interest expense for the quarter ended May 31, 2000, increased $400,000
to $2.2 million from $1.8 million for the same period in 1999. In the quarter
ended May 31, 1999, the Company had an accounts receivable securitization
borrowing program (the "Securitization Program"). The discount on the sale of
accounts receivable of $723,000 for the quarter ended May 31, 1999, was
recorded as the "Discount on sale of accounts receivable and other expense" on
the statement of operations. For comparative purposes, the discount on sale of
accounts receivable of $723,000 should be combined with the $1.8 million
interest expense for a total interest expense of $2.5 million in the prior
year. The lower combined interest expense of $2.2 million in the quarter ended
May 31, 2000, as compared to $2.5 million in the prior year is a result of the
lower average borrowings of $90.1 million in the quarter ended May 31, 2000 as
compared to $147.8 million in the same period in the prior year. The impact of
the lower average borrowings was partially offset by higher interest rates in
the quarter ended May 31, 2000 as compared to the same period in the prior
year.
For the quarter ended May 31, 2000, the Company recorded an income tax
benefit of $2.6 million. However, the Company made an offsetting $2.6 million
adjustment to the deferred tax asset valuation allowance which reduced the
income benefit for the quarter to zero. Management concluded that the
realization of its net deferred tax assets is not likely and, accordingly,
increased the valuation allowance. 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.
RESTRUCTURING CHARGES
During the years ended February 28, 1999 and February 29, 2000, the Company
performed extensive reviews of its unprofitable branches. The Company
determined that 56 branches should be closed based on either of the following
criteria: (1) the branch location was already in a market sufficiently
serviced by a Pameco branch or (2) the branch location was in an area with
limited demand. From the period June 1, 1999, to May 31, 2000, the Company
closed 39 of these 56 branches. Since the Company had previously closed 11
branches in the quarter ended May 31, 1999, it has now closed 50 of the
branches identified in the restructuring charges. The remaining branch
closings should be completed by August 31, 2000. By closing or consolidating
branches in these markets, the Company seeks to reduce its inventory levels
and operating expenses. The Company does not expect the demographics of these
markets to change significantly enough within the next several years for these
branches to become profitable.
8
<PAGE>
In connection with the closure and the consolidation of these 56 branches,
the Company recorded $4.5 million of restructuring charges. The charges
consisted of the following components: (1) lease and other facility expenses
of $2.3 million; (2) the write off of $584,000 of fixed assets no longer in
use; (3) severance payments of $187,000; and (4) an asset impairment charge of
$1.4 million for the write off of goodwill associated with certain branches to
be closed. The following table provides more detail describing the activity
during the quarter ended May 31, 2000 for the above restructuring and
severance charges:
<TABLE>
<CAPTION>
Reserve Reserve
Balance Charged Balance
Cash/ February 29, to May 31,
Description Non-Cash 2000 Accrual 2000
----------- -------- ------------ ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Branches to be closed
Lease............................... Cash $(1,380) $76 $(1,304)
Severance........................... Cash (143) 2 (141)
Fixed asset write-off............... Non-Cash (216) (216)
Utilities and other................. Cash (221) (221)
------- --- -------
Total................................. (1,960) 78 (1,882)
======= === =======
</TABLE>
The majority of the cash expenditures related to branch closures, excluding
lease commitments, were completed by February 2000. The Company will continue
to pay on certain lease commitments through 2001. To date, the Company has
paid approximately $431,897 to terminate leases.
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 three months ended May
31, 2000, cash used in operating activities was $17.3 million as compared to
$6.6 million provided by operating activities for the three months ended May
31, 1999. Net cash used in investing activities was $291,000 for the three
months ended May 31, 2000, as compared to $1.2 million for the three months
ended May 31, 1999. Such capital expenditures were primarily for branch and
distribution center leasehold improvements, equipment, computer hardware, and
supply chain software. Net cash provided by financing activities was $17.6
million for the three months ended May 31, 2000, while such activities used
$5.4 million in the three months ended May 31, 1999.
The Company's working capital increased to $92.7 million at May 31, 2000,
from $80.1 million at February 29, 2000.
On February 17, 2000, the Company entered into an agreement with a new
primary lender and various participating lenders (the "Lenders") to obtain
financing under a senior credit facility amounting to an aggregate of $130
million (the "New Credit Agreement"). The New Credit Agreement provides for
(a) a revolving line of credit of $130.0 million (the "New Revolver
Facility"), and (b) a subfacility of the Revolver Facility providing for the
issuance of letters of credit (the "LC Facility"), not to exceed $15 million
(such amount to be calculated as part of, and not in addition to, the
aggregate limit of the Credit Agreement). At May 31, 2000, $3.1 million was
outstanding on the LC Facility.
At May 31, 2000, the Company had borrowings of $78.1 million outstanding
under the New Revolver Facility. These borrowings are due February 17, 2005.
Interest is based on LIBOR plus 2.75% for specified loan amounts and the prime
rate plus .75% for borrowings in excess of specified loan amounts. The
effective borrowing rate at May 31, 2000 was 9.04%.
9
<PAGE>
At February 29, 2000, debt includes a $20.0 million subordinated debt
agreement (the "Subdebt Facility") entered into on February 18, 2000, in
connection with the $130.0 million New Credit Agreement. The Subdebt Facility
bears interest of 12% per annum due quarterly. The 12% interest rate consists
of 6% payable in cash and 6% added to principal ("Paid in Kind" interest).
Principal plus Paid in Kind interest of $2.0 million is due at March 31, 2003
and 2004, respectively, and the remaining balance is due on March 31, 2005.
In connection with the $20.0 million Subdebt Facility and effective February
18, 2000, the Company entered into future inventory purchase agreements with
the owners of such Subdebt Facility. These agreements require the Company to
purchase minimum percentages of its annual inventory demand for certain
products over the next five years from specified suppliers. Failure to meet
these minimum percentages would result in penalties and default on the
associated $20.0 million Subdebt Facility. Minimum commitments under these
purchase agreements for the next five fiscal years are: 2001-$20.1 million;
2002-$24.3 million; 2003-$25.7 million; 2004-$26.1 million; and 2005 and
thereafter $27.2 million. For the year ended February 29, 2000, the Company
purchased $200.2 million of inventory from these specified suppliers.
The New Credit Agreement and the Subdebt Facility require compliance with
specific levels of net worth, earnings before interest, taxes, depreciation,
and amortization ("EBITDA"), and a specified fixed charges coverage ratio. The
negative covenants include various limitations on indebtedness, liens,
fundamentals changes, dividends, and investments. At May 31, 2000, the Company
complied with all covenants. The Company has granted a security interest to
the Lenders for substantially all the assets of the Company, including the
accounts receivable, inventory, and equipment, as collateral for the debt.
On May 18, 2000, the Company entered into an amendment and waiver to the New
Credit Agreement. In general, the amendment waived the Company's violation of
the consolidated net worth covenant, modified the definition of consolidated
net worth, and reduced the levels of consolidated net worth required for
future periods. The covenant violation was primarily attributable to the
establishment of a non-cash valuation allowance for deferred tax assets. In
February 2000, in connection with the significant loss incurred by the Company
during the fourth quarter of the year, management concluded that realization
of its net deferred tax assets was no longer likely and, accordingly,
increased the valuation allowance to fully provide for such assets. Although
the asset was fully reserved on the Company's balance sheet, the benefit
remains available through a concomitant increase in the Company's tax loss
carry forward provision. As such, the related reduction in net worth has no
cash impact on the Company. In addition, the Subdebt Facility contains
provisions whereby amendments to the New Credit Agreement are automatically
incorporated into the Subdebt Facility.
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.
PART II. OTHER INFORMATION
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.41ASecond Amendment to Loan and Security Agreement
27.Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
10
<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)
/s/ Robert J. Davis
By: _________________________________
Robert J. Davis
Chief Financial Officer
July 14, 2000
11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
10.41A Second Amendment to Loan & Security Agreement
27. Financial Data Schedule (for SEC use only)
</TABLE>
12
