UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 NO.: 0-26640
-------
SCP POOL CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3943363
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
109 Northpark Boulevard, Covington, Louisiana 70433-5001
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
504-892-5521
------------
(Registrant's telephone number, including area code)
________________________________________________________________________________
(former name, former address and former fiscal year, if changed since last
report)
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 period 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 _______
---
At August 12, 1999, there were 11,552,648 outstanding shares of the Registrant's
Common Stock, $.001 par value per share.
SCP POOL CORPORATION
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999
(Unaudited) and December 31, 1998................................ 1
Consolidated Statements of Operations (Unaudited) -Three
Months Ended June 30, 1999 and 1998 and Six Months Ended
June 30, 1999 and 1998............................................ 2
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1999 and 1998........................... 3
Notes to Consolidated Financial Statements (Unaudited) -
June 30, 1999..................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 6
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................. 14
Part II. Other Information
Items 1. - 6. ................................................................ 15
SCP POOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1999 1998
----------- ------------
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 7,794 $ 4,911
Receivables 91,553 34,609
Inventory 89,316 69,377
Prepaid expenses 739 1,673
Deferred income taxes 2,078 1,600
----------------------------
Total current assets 191,480 112,170
Property and equipment, net 6,538 5,435
Goodwill, net 48,386 43,940
Other assets, net 4,536 2,243
----------------------------
Total assets $ 250,940 $ 163,788
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 67,308 $ 34,589
Accrued and other current liabilities 23,388 10,909
Current portion of long-term debt 5,305 5,000
------------------------------
Total current liabilities 96,001 50,498
Long-term liabilities:
Deferred income taxes 3,827 4,030
Long-term debt, less current portion 55,421 28,696
----------------------------
Total long-term liabilities 59,248 32,726
----------------------------
Total liabilities 155,249 83,224
Stockholders' equity:
Preferred stock, $.01 par value; 100,000 shares
authorized -
Common stock, $.001 par value; 20,000,000 shares
authorized; 11,547,559 and 11,639,434 shares issued
and outstanding in 1999 and 1998, respectively 11 12
Treasury stock (2,678) -
Additional paid-in capital 54,359 52,516
Retained earnings 44,029 28,013
Accumulated other comprehensive income (30) 23
----------------------------
Total stockholders' equity 95,691 80,564
----------------------------
Total liabilities and stockholders' equity $ 250,940 $ 163,788
============================
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
1
SCP POOL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------- --------- -------- --------
(Unaudited) (Unaudited)
Net sales $225,125 $ 178,450 $324,031 $ 252,438
Cost of sales 170,479 136,635 246,630 194,676
--------------------------------------------------------
Gross profit 54,646 41,815 77,401 57,762
Selling and
administrative expenses 26,394 21,006 46,850 37,854
Goodwill amortization 326 255 652 510
--------------------------------------------------------
Operating income 27,926 20,554 29,899 19,398
Other income (expense):
Interest expense (920) (1,084) (1,772) (1,860)
Amortization expense (757) (213) (1,073) (423)
Miscellaneous income (1,037) 161 (763) 430
--------------------------------------------------------
(2,714) (1,136) (3,608) (1,853)
--------------------------------------------------------
Income before income taxes 25,212 19,418 26,291 17,545
Income tax provision 9,335 7,185 9,736 6,492
Income before change in
accounting principle 15,877 12,233 16,555 11,053
Change in accounting
principle, net of tax - - (544) -
--------------------------------------------------------
Net income $ 15,877 $ 12,233 $ 16,011 $ 11,053
========================================================
Net income per share of
common stock:
Basic:
Income before change in
accounting principle $ 1.38 $ 1.05 $ 1.43 $ .95
Change in accounting principle - - .05 -
--------------------------------------------------------
Net income $ 1.38 $ 1.05 $ 1.38 $ .95
========================================================
Diluted:
Income before change
in accounting principle $ 1.34 $ 1.03 $ 1.39 $ .93
Change in accounting principle - - .04 -
--------------------------------------------------------
Net income $ 1.34 $ 1.03 $ 1.35 $ .93
========================================================
Average shares outstanding:
Basic 11,513 11,625 15,562 11,619
========================================================
Diluted 11,872 11,926 11,890 11,910
========================================================
See accompanying notes.
2
SCP POOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
1999 1998
-------------- -----------
(Unaudited)
Operating activities
Net income $ 16,555 $ 11,053
Adjustments to reconcile net income to net cash
provided by (used in) operating activities 15,859 (29,216)
----------------------------
Net cash provided by (used in) operating 696 (18,163)
activities
Investing activities
Acquisition of businesses (22,577) (22,902)
Purchase of property and equipment (2,080) (1,225)
Proceeds from sale of property and equipment 702 852
----------------------------
Net cash used in investing activities (23,955) (23,275)
Financing activities
Net borrowings on revolving loan 27,975 23,650
Payments on long-term debt (945) (2,876)
Issuance of common stock 1,843 95
Purchase of Treasury Stock (2,678) -
----------------------------
Net cash provided by financing activities 26,195 20,869
Effect of exchange rate changes on cash (53) -
Net increase (decrease) in cash 2,883 (20,569)
Cash and cash equivalents at beginning of period 4,911 22,296
----------------------------
Cash and cash equivalents at end of period $ 7,794 $ 1,727
============================
Supplemental cash flow information
Cash paid during the period for:
Interest $ 1,682 $ 1,502
============================
Income taxes $ 1,344 $ 519
============================
See accompanying notes.
3
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
1. Unaudited Interim Financial Statements
The accompanying unaudited 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. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of
management, the accompanying unaudited interim financial statements reflect all
adjustments, of a normal recurring nature, necessary for a fair presentation of
the results of the interim periods.
The Company's business is highly seasonal. In general, sales and net income are
highest during the second and third quarters, which represent the peak months of
swimming pool use and installation. Operating results for the three-month or
six-month periods ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements for the year ended
December 31, 1998 and footnotes thereto included in the annual report on Form
10-K filed by the Company with the Securities and Exchange Commission.
2. Description of Business
As of June 30, 1999, the Company maintained 100 service centers in 34 states and
2 service centers in the United Kingdom from which it sells swimming pool
equipment, parts and supplies to pool builders, retail stores, and service
firms.
In January 1999, the Company acquired certain assets of Benson Pump Company (the
"Benson Acquisition"), which distributed swimming pool supplies and related
products through its 20 service centers in 16 states, for a cash purchase price
of approximately $21.8 million (including payments related to a noncompete
agreement). The Company consolidated 13 of these service center locations into
the Company's existing service center locations. This acquisition was accounted
for using the purchase method of accounting. In January 1999, the Company
acquired the capital stock of Pratts Plastics Limited, which distributed
swimming pool supplies through one service center in Essex, England under the
trade name "The Swimming Pool Warehouse."
4
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(CONTINUED)
3. Earnings Per Share
Basic income per common share equals net income divided by the weighted average
number of common shares outstanding during the period. Diluted income per
common share equals net income plus the after tax interest incurred on the
Company's convertible notes, divided by common shares outstanding after giving
effect to shares assumed to be issued on conversion of those notes.
In July 1998, the Board of Directors declared a three-for-two stock split of the
Company's common stock, which was paid in the form of a stock dividend on July
24, 1998 to the stockholders of record at the close of business on July 13,
1998. Accordingly, shares, per-share data and related capital amounts for all
periods presented reflect the effects of this split.
4. Change in Accounting Principle
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities".
The Company adopted the SOP on January 1, 1999, and wrote-off the unamortized
balance of start-up costs of $863,000, net of a $319,000 tax benefit, as a
cumulative effect of an accounting change.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company derives its revenues primarily from the sale of swimming pool
equipment, parts and supplies and related products, including chemicals,
cleaners, packaged pools and liners, filters, heaters, pumps, lights, repair
parts and other equipment required to build, maintain, install and overhaul
residential and small commercial swimming pools. The Company sells its products
primarily to swimming pool remodelers and builders, independent swimming pool
retailers and swimming pool repair and service companies. These customers tend
to be small, family owned businesses with relatively limited capital resources.
The Company maintains a strict credit policy. Losses from customer receivables
have historically been within management's expectations.
The principal components of the Company's expenses include the cost of products
purchased from manufacturers and sold during the year and operating expenses,
which are primarily related to labor, occupancy, marketing, and selling and
administrative expense.
Results of Operations
The following table shows, for the periods indicated, information derived from
the consolidated statements of operations of the Company expressed as a
percentage of net sales for such period.
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Net sales 100.00% 100.0% 100.0% 100.0%
Cost of sales 75.7 76.6 76.1 77.1
-----------------------------------------------------------
Gross profit 24.3 23.4 23.9 22.9
Selling and administrative
expenses 11.7 11.8 14.5 15.0
Goodwill amortization .2 .1 .2 .2
-----------------------------------------------------------
Operating income 12.4 11.5 9.2 7.7
Other income (expense):
Interest expense (.4) (.6) (.5) (.7)
Amortization expense (.3) (.1) (.3) (.2)
Miscellaneous (.5) .1 (.2) .2
-----------------------------------------------------------
Income before income taxes
and change in accounting
principle 11.2% 10.9% 8.2% 7.0%
-----------------------------------------------------------
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Results of Operations (continued)
The following discussions compare the results of operations of the Company for
the three month and six month periods ended June 30, 1999 and 1998.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net sales increased by $46.7 million, or 26.2%, to $225.1 million in the three
months ended June 30, 1999 from $178.4 million in the comparable 1998 period.
Service centers acquired in the Benson Acquisition in 1999 contributed $10.6
million, service centers acquired in the United Kingdom contributed $3.8
million, while an increase of approximately 15.7% in sales at service centers
open at least 15 months contributed $22.9 million to the increase. The balance
of the increase was attributable to sales at new service centers open less than
15 months.
Gross profit increased by $12.8 million, or 30.6%, to $54.6 million in the three
months ended June 30, 1999 from $41.8 million in the comparable 1998 period. An
increase in same store gross profit margin of 19.7% accounted for $6.7 million
of the increase. Gross profit as a percentage of net sales increased 0.9% to
24.3% in the 1999 period from 23.4% in the 1998 period. The increase in margin
is attributable to the higher margins realized in 1999 across all divisions.
The same store gross profit margin as a percentage of sales increased by 0.8%
compared to the same quarter last year.
Operating expenses increased by $5.5 million, or 25.9%, to $26.7 million in the
three months ended June 30, 1999 from $21.2 million in the comparable 1998
period. This increase reflects an additional $1.3 million of operating expenses
incurred at service centers acquired in the Benson acquisition and from NorCal
Limited and the foreign market. The remaining increase reflects salaries,
occupancy expense, and other costs associated with new service centers and the
payroll and other operating costs required to support the increased sales volume
at existing service centers. Operating expenses as a percentage of sales
remained unchanged at 11.9% in the 1999 period compared to the 1998 period.
Interest and other expenses increased by $1.6 million, or 145.5%, to $2.7
million in the three months ended June 30, 1999 from $1.1 million in the
comparable 1998 period. The increase is primarily attributable to the write off
of $1.2 million related to computer equipment replaced in connection with
improvements to the Company's information system and Year 2000 efforts.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Results of Operations (continued)
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998.
Net sales increased by $71.6 million, or 28.4%, to $324.0 million in the six
months ended June 30, 1999 from $252.4 million in the comparable 1998 period.
Service centers acquired in the Benson Acquisition in 1999 contributed $13.4
million, service centers acquired in the foreign market contributed $6.1
million, while an increase of approximately 17.1% in sales at service centers
open at least 15 months contributed $34.5 million to the increase. The balance
of the increase was attributable to sales at new service centers open less than
15 months.
Gross profit increased by $19.7 million, or 34.1% to $77.4 million in the six
months ended June 30, 1999 from $57.8 million in the comparable 1998 period. An
increase in same store gross profit margin of 21.9% accounted for $10.1 million
of the increase. Gross profit as a percentage of net sales increased 1.0% to
23.9% in the 1999 period compared to 22.9% in the 1998 period. The increase in
margin is attributable to the higher margins realized in 1999 across all
divisions. The same store gross profit margin as a percentage of sales
increased by 1.0% compared to the same period last year.
Operating expenses increased by $9.1 million, or 23.7%, to $47.5 million in the
six months ended June 30, 1999 from $38.4 million in the comparable 1998 period.
This increase reflects an additional $2.2 million of operating expenses incurred
at service centers acquired from Benson Pump and the foreign market. The
remaining increase is reflective of salaries, occupancy expense, and other costs
associated with new service centers and the payroll and other operating costs
required to support the increased sales volume at existing service centers.
Operating expenses as a percentage of sales decreased 0.5% to 14.7% in the 1999
period compared to 15.2% in the 1998 period.
Interest and other expenses increased $1.7 million to $3.6 million in the six
months ended June 30, 1999 from $1.9 million in the comparable 1998 period. The
increase is primarily attributable to the write off of $1.2 million related to
computer equipment replaced in connection with improvements to the company's
information system and Year 2000 efforts.
Seasonality and Quarterly Fluctuations
The Company's business is highly seasonal. In general, sales and net income are
highest during the second and third quarters, which represent the peak months of
swimming pool use and installation. Sales are substantially lower during the
first and fourth quarters, when the Company may incur net losses.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Seasonality and Quarterly Fluctuations (continued)
The Company experiences a build-up of inventory and accounts payable during the
first and second quarters of the year in anticipation of the peak swimming pool
supply selling season. The Company's peak borrowing occurs during the second
quarter, primarily because dated accounts payable offered by the Company's
suppliers typically are payable in April, May and June, while the Company's peak
accounts receivable collections typically occur in June, July and August.
The principal external factor affecting the Company's business is weather. Hot
weather can increase purchases of chemicals and supplies and pool installations.
Unseasonably cool weather or extraordinary amounts of rainfall during the peak
sales season can decrease purchases of chemicals and supplies and pool
installations. In addition, unseasonably early or late warming trends can
increase or decrease the length of the pool season and, consequently, the
Company's sales.
To encourage preseason orders, the Company, like many other swimming pool supply
distributors, utilizes preseason sales programs which provide for extended
dating terms and other incentives to its customers. Some of the Company's
suppliers also offer extended dating terms on certain products to the Company
for preseason or early season purchases. In offering extended dating terms to
its customers and accepting extended dating terms from its suppliers, the
Company effectively finances a portion of its receivables with extended
payables.
The Company expects that its quarterly results of operations will continue to
fluctuate depending on the timing and amount of revenue contributed by new
service centers and acquisitions, if any. The Company attempts to open its new
stores during the fourth quarter or the beginning of the first quarter of the
subsequent year to take advantage of preseason sales programs and the peak
season.
The following table sets forth certain unaudited quarterly data for 1998 and the
first two quarters for 1999 which, in the opinion of management, reflect all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of such data. Results of any one or more quarters are
not necessarily indicative of results for an entire fiscal year or of continuing
trends.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
1999 1998
------------------------------------------------------------------------------------
1st 2nd 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
Net sales $98,906 $225,125 $73,988 $178,450 $133,883 $71,277
Gross profit 22,755 54,646 15,947 41,815 30,051 14,726
Operating income (loss) 1,973 27,926 (1,156) 20,554 10,017 (4,030)
Net sales as a percentage of annual N/A N/A 16% 39% 29% 16%
net sales
Gross profit as a percentage of
annual gross profit N/A N/A 16% 41% 29% 14%
Operating income as a percentage of
annual operating income N/A N/A (4)% 81% 39% (16)%
Liquidity and Capital Resources
Currently, the Company's primary sources of working capital are cash flow from
operations and borrowings under its Senior Loan Facility, which consists of a
term loan and a revolving line of credit. The Company's borrowings under its
credit facilities, together with cash flow from operations and seller financing
have historically been sufficient to support the Company's growth and to finance
acquisitions. Considering the Company's borrowing base as of June 30, 1999, the
Company had approximately $19.5 million available for borrowing under its Senior
Loan Facility, the only additional credit source currently available to the
Company.
During the six months ended June 30, 1999, the Company borrowed $28.0 million to
meet seasonal working capital requirements and made scheduled principal payments
of $1.2 million required under its Senior Loan Facility.
Borrowings under the Senior Loan Facility may, at the Company's option, bear
interest at either (i) the agent bank's corporate base rate or the federal funds
rate plus 0.5%, whichever is higher, plus a margin ranging from 0.0% to .5% or
(ii) LIBOR plus a margin ranging from .75% to 2.0%, in each case depending on
the Company's leverage ratio. Substantially all of the assets of South Central
Pool Supply, Inc., including the capital stock of its wholly owned subsidiaries,
secure the obligations under the Senior Loan Facility. The Senior Loan Facility
has numerous restrictive covenants which require the Company to maintain minimum
levels of interest coverage and fixed charge coverage and which also restrict
the Company's ability to pay dividends and make capital expenditures.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Liquidity and Capital Resources (continued)
As of June 30, 1999, the Company was in compliance with all such covenants and
financial ratio requirements. The Senior Loan Facility matures on December 31,
2002.
With the exception of the acquisition of the assets of Bicknell Huston
Distributors, Inc. (which was financed through issuance of common stock to the
public), the Company's acquisitions have been financed primarily by borrowings
under its credit facilities and seller financing. To finance future
acquisitions, the Company may utilize its ability to borrow additional funds
under the Senior Loan Facility or, depending on market conditions, incur
additional indebtedness or issue common or preferred stock (which may be issued
to third parties or to sellers of acquired businesses).
Year 2000 Issue
The Company utilizes and relies upon computer technology in many facets of its
operations, including its inventory and order information systems, the internal
and external reporting of financial and operating information and other systems
and equipment, such as telephones and security systems. The Company is currently
continuing its Year 2000 compliance program, which it initiated in 1997.
State of Readiness - The Company's core accounting and information systems date
calculations are based on consecutively numbered days, and not the "month-date-
year" format which is more vulnerable to Year 2000 problems. The Company's
hardware and software system vendors have assured the Company that its systems
are able to correctly function beyond 1999 when handling date-related data. To
verify the assurances of third-party hardware and software vendors regarding
Year 2000 issues, the Company has been testing its hardware and software under a
testing program. A portion of the testing program was conducted during the
fourth quarter of 1998, and those tests did not identify any areas of Year 2000
noncompliance. The Company worked with consultants during the first and second
quarter to develop additional testing procedures, and the Company will execute
such procedures during the third quarter of 1999. The Company will work to
remediate any Year 2000 noncompliance as such noncompliance is identified as a
result of the testing program.
The Company has completed the process of collecting information from each of its
service centers regarding all other devices, such as personal computers,
telephones, security systems, and office and warehouse equipment which may have
"embedded" microprocessors utilizing date information. The testing and any
necessary remediation of such equipment is expected to be complete by September
1999.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Year 2000 (continued)
If the testing and remediation steps described above are not accomplished in a
timely manner, the Year 2000 issue could have a material impact on the Company's
operations.
The Company is still communicating with its major suppliers and service
providers regarding their compliance with Year 2000 requirements. The Company
has sent out questionnaires to crucial suppliers and service providers to
identify potential problems and assess the compliance efforts undertaken by
these parties. The Company has received responses from a majority of such
parties. Most of the responses indicated that efforts to comply with Year 2000
requirements are ongoing, so further communications with the Company's major
suppliers and service providers have been required. There can be no guarantee
that the systems of third parties will be made compliant in a timely manner and
that noncompliance of third parties will not have an adverse effect on the
Company.
Costs to Address the Year 2000 Issue - The Company has incurred costs of
$330,000 to upgrade certain data communications equipment, including the
Company's e-mail system. The Company believes that this data communications
upgrade would have been required in the normal course, but the Company
accelerated the timing of this upgrade in part to improve its Year 2000
readiness.
During the second quarter of 1999, the Company upgraded the main system server
for a total cost of $700,000. The Company believes this cost is, for the most
part, not directly related to Year 2000 issues, but the new server was validated
to contain Year 2000 operating system code. The Company has completed its risk
assessment phase for all systems and equipment. Based on current information,
the Company believes that the costs associated with additional testing and
remediation are not likely to have a material adverse effect on the Company's
business, financial condition or operating results. Management anticipates
funding the costs to address the Year 2000 issue with cash generated from
operations and from borrowing capacity under the Senior Loan Facility.
Risks Presented by the Year 2000 Issue - There may be unanticipated delays in
completing the Company's planned Year 2000 remediation, and as the process of
testing the systems proceeds, the Company may identify additional system
functions that present a Year 2000 risk. In addition, if any third parties who
provide goods or services essential to the Company's business activities fail to
appropriately address their Year 2000 issues, such failure could have a material
adverse effect on the Company's business, financial condition, or operating
results. For example, a Year 2000 related disruption on the part of the
financial institutions which process the Company's transactions could have a
material adverse effect on the Company's business, financial condition or
operating results.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Year 2000 (continued)
Contingency Plans - The Company's Year 2000 initiative includes the development
of contingency plans to address failures of significant portions of the
Company's systems or failures by third parties who provide goods or services
essential to the Company's business to address their Year 2000 issues. The
Company has been working with consultants to develop such plans and expect to
conclude the development of these contingency plans during the third quarter of
1999.
13
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
As a result of the variable interest rates on the Senior Revolving Note and
Senior Term Note under the Senior Loan Facility, the Company is exposed to
changes in short-term interest rates. If (a) the variable rates on the Company's
Senior Loan Facility were to increase by 1% from the rate at December 31, 1998;
(b) the Company borrowed the maximum amount available under its revolving line
of credit ($65.0 million) for all of 1999, and (c) the Company made all required
payments of principal ($5 million) in 1999, solely as a result of the increase
in interest rates, then the Company's interest expense would increase, resulting
in a $287,000 decrease in net income, assuming an effective tax rate of 37%. The
fair value of the Company's Senior Revolving Note and Senior Term Note is not
affected by changes in market interest rates.
Foreign Exchange Risk
The Company has two service centers located in the United Kingdom for which the
functional currency is the British pound. The Company typically does not hedge
its foreign currency exposure. Historically, fluctuations in British pound/U.S.
dollar exchange rates have not had a material effect on the Company. Future
changes in the exchange rate of the U.S. dollar to the British pound may
positively or negatively impact the Company's revenues, operating expenses and
earnings; however, due to the size of its operations in the United Kingdom, the
Company does not anticipate its exposure to foreign currency rate fluctuations
to be material in 1999.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
With the exception of historical matters, the matters discussed in this Form 10-
Q are forward-looking statements that involve risks and uncertainties, including
but not limited to factors related to (i) the sensitivity of the swimming pool
supply business to cool or rainy weather; (ii) the intense competition and low
barriers to entry in the swimming pool supply industry; (iii) the Company's
ability to identify appropriate acquisition candidates, complete acquisitions on
satisfactory terms, or successfully integrate acquired businesses; (iv) the
sensitivity of the swimming pool supply business to general economic conditions;
(v) the Company's ability to obtain financing on satisfactory terms and the
degree to which Company is leveraged; (vi) the risk of fire, safety and casualty
losses and related liabilities claims inherent in the storage of chemicals sold
by the Company; (vii) Year 2000 issues; (viii) the Company's ability to remain
in compliance with the numerous environmental, health and safety requirements to
which it is subject; and (ix) the other factors discussed in the Company's
filings with the Securities and Exchange Commission. Such factors could affect
the Company's actual results and could cause such results to differ materially
from the Company's expectations described above.
14
Part II. Other Information
Item 1. Legal Proceedings
The Company currently is not involved in any material legal
proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
None
15
SIGNATURE
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.
SCP POOL CORPORATION
--------------------
DATE: August 12, 1999 BY: /s/ CRAIG K. HUBBARD
------------------------------------------------
Craig K. Hubbard, Chief Financial Officer,
Treasurer and Secretary and duly authorized
signatory on behalf of the Registrant
16