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, 1996, 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
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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.)
128 Northpark Boulevard, Covington, Louisiana 70433-5070
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
504-892-5521
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(Registrant's telephone number, including area code)
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(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 July 31, 1996, there were 4,222,809 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, 1996
(Unaudited) and December 31, 1995...................... 1
Consolidated Statements of Income --
Three Months Ended March 31, 1996 and
1995 (Unaudited) and Six Months Ended
June 30, 1996 and 1995 (Unaudited)..................... 2
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1996 and 1995
(Unaudited)............................................ 3
Notes to Consolidated Financial Statements
(Unaudited)--June 30, 1996............................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 7
Part II. Other Information
Items 1. - 6...................................................... 16
SCP POOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 4,451 $ 2,043
Receivables 31,584 12,090
Inventory, primarily goods purchased
for resale 38,520 25,230
Prepaid expenses 1,119 363
Deferred income taxes 151 145
-------------------------
Total current assets 78,825 39,871
Property and equipment, net 3,492 3,470
Goodwill, net 29,341 29,725
Other assets, net 2,139 2,331
-------------------------
Total assets $110,797 $75,397
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,997 $12,726
Accrued and other current liabilities 7,731 3,075
Current portion of long-term debt 3,635 2,883
-------------------------
Total current liabilities 36,363 18,684
Deferred income taxes 881 843
Long-term debt, less current portion 35,584 23,593
Stockholders' equity:
Preferred stock, $.01 par value;
100,000 shares authorized - -
Common stock, $.001 par value;
10,000,000 shares authorized;
4,222,809 shares issued and
outstanding in 1996 and 1995 4 4
Additional paid-in capital 29,587 29,587
Retained earnings 8,378 2,686
-------------------------
Total stockholders' equity 37,969 32,277
-------------------------
Total liabilities and
stockholders' equity $110,797 $75,397
=========================
Note: The balance sheet at December 31, 1995 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 INCOME
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------- ------- -------- -------
(Unaudited) (Unaudited)
Net sales $85,867 $66,667 $127,012 $92,513
Cost of sales 65,825 51,868 97,697 71,760
---------------------------------------------
Gross profit 20,042 14,799 29,315 20,753
Warehouse expense 2,637 2,049 4,608 3,212
Selling and administrative
expenses 7,369 5,121 13,736 9,081
Goodwill amortization 193 182 385 360
---------------------------------------------
Operating income 9,843 7,447 10,586 8,100
Other income (expense):
Interest expense (684) (1,477) (1,272) (2,593)
Amortization expense (133) (167) (265) (308)
Management fees paid to majority stockholder - (62) - (125)
Miscellaneous income 177 60 283 82
---------------------------------------------
(640) (1,646) (1,254) (2,944)
---------------------------------------------
Income before income taxes 9,203 5,801 9,332 5,156
Provision for income taxes 3,588 2,215 3,639 1,975
---------------------------------------------
Net income $ 5,615 $ 3,586 $ 5,693 $ 3,181
=============================================
Net income per share of common stock:
Primary $ 1.33 $ 2.59 $ 1.35 $ 2.30
=============================================
Fully diluted $1.30 $2.44 $1.32 $2.17
=============================================
Average shares outstanding:
Primary 4,223 1,384 4,223 1,384
=============================================
Fully diluted 4,308 1,469 4,308 1,469
=============================================
See accompanying notes.
2
SCP POOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30,
1996 1995
-------- ----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 5,693 $ 3,181
Adjustments to reconcile net income
to net cash used in operating
activities (15,660) (11,987)
--------------------
Net cash used in operating
activities (9,967) (8,806)
INVESTING ACTIVITIES
Acquisition of businesses - (6,013)
Purchase of property and equipment (514) (363)
Proceeds from sale of property and equipment 1,466 4
--------------------
Net cash used in investing activities (368) (6,372)
FINANCING ACTIVITIES
Proceeds on long-term debt - 7,200
Net borrowings of revolving loan 14,500 12,065
Payments on long-term debt (1,757) (750)
Issuance of common stock - 300
-------------------
Net cash provided by financing activities 12,743 18,815
-------------------
Change in cash and cash equivalents 2,408 3,637
Cash and cash equivalents at beginning of period 2,043 844
-------------------
Cash and cash equivalents at end of period $ 4,451 $ 4,481
===================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the period of:
Interest $ 1,139 $ 2,145
===================
Income taxes $ - $ (284)
===================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Long-term debt issued to acquire businesses $ - $ 2,650
===================
See accompanying notes.
3
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
JUNE 30, 1996
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 include all
adjustments, consisting of only normal recurring adjustments, 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, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements for the year ended
December 31, 1995 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, 1996, SCP Pool Corporation and its wholly owned subsidiaries
(collectively referred to as the Company) maintain 44 service centers in 22
states located throughout the United States, except in the Northeast, from which
they sell swimming pool equipment and supplies to pool builders, retail stores,
and service firms. The Company through its wholly owned subsidiary, Alliance
Packaging, Inc. (Alliance) also owns and operates a manufacturing and
repackaging facility in Dallas, Texas, which produces a substantial portion of
the Company's chemical products and also sells to other wholesale distributors
and large retailers.
3. EARNINGS PER SHARE
Primary income per common share equals net income divided by the weighted
average number of common shares outstanding during the period. Fully 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. For
both 1996 and 1995, the effect of stock options outstanding are immaterial.
4
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
3. EARNINGS PER SHARE (CONTINUED)
The Company completed its initial public offering of its common stock in October
1995. A recapitalization occurred in connection with this public offering which
included the exchange of $7,200,000 of Junior Subordinated Notes for shares of
common stock.
The computation of net income, weighted average shares outstanding and net
income per share, assuming the Company's initial public offering and
recapitalization had taken place at the beginning of 1995, are as follows (in
thousands, except per share data):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1995 1995
-------------------------
NET INCOME
Primary:
Historical net income $ 3,586 $ 3,181
Adjustments:
Interest expense resulting from recapitalization and the
application of net proceeds of the offering 627 1,254
Management fee paid to majority stockholder 62 125
Amortization of financing fees of indebtedness repaid 43 86
Income tax effect (285) (571)
----------------------------
Adjusted net income $ 4,033 $ 4,075
Fully diluted:
Adjustment for interest expense, net of tax, on Convertible Notes 2 4
----------------------------
Adjusted net income $ 4,035 $ 4,078
============================
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary:
Historical weighted average shares of common stock 1,384 1,384
Adjustment for shares added as a result of:
Conversion of Junior Subordinated Notes 686 686
Initial public offering 2,053 2,053
Exercise of overallotment option 100 100
----------------------------
4,223 4,223
Fully diluted:
Adjustment for shares related to Convertible Notes 85 85
----------------------------
4,308 4,308
============================
SUPPLEMENTARY NET INCOME PER SHARE
Primary $ .96 $ .97
Fully diluted $ .94 $ .95
5
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
4. SUBSEQUENT EVENTS
On July 15, 1996, the Company announced it had entered into a preliminary letter
of intent with BioLab, Inc. (BioLab), a wholly-owned subsidiary of Great Lakes
Chemical Corporation. Under the agreement, the Company would acquire certain
assets of the B-L Network, Inc., a subsidiary of BioLab which distributes
swimming pool supplies through 39 service centers in 12 states (the BLN
Acquisition). In particular, the BioLab service centers would expand the
Company's presence in the Florida, California and Arizona markets. The agreement
would also involve the purchase by BioLab of certain assets of Alliance.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was formed in December 1993 to acquire substantially all of the
assets and assume certain liabilities of its predecessor. From its inception in
1980 through the end of 1993, the Predecessor steadily increased its sales by
opening new service center locations and by increasing sales to new and existing
customers. Since the Company's acquisition of the Predecessor in December 1993
(the "SCP Acquisition"), the Company has grown by opening new service centers
and increasing sales to new and existing customers, and through strategic
acquisitions. From January 1, 1990 to June 30, 1996, the Company expanded from 8
service centers in 6 states to 44 service centers in 22 states.
The Company's acquisitions since the SCP Acquisition include: (i) the
acquisition of certain assets of Aqua Fab Industries, Inc. in January 1994,
including eight service centers in the southeast and midwest regions of the
United States, three of which the Company subsequently closed and consolidated
into existing service centers; (ii) the acquisition by Alliance of the chemical
manufacturing and repacking assets of York Chemical Corporation and Wexco
Incorporated in January 1995 (the "York Acquisition"); (iii) the acquisition of
all of the outstanding capital stock of Orcal Pool Supplies, Inc. in February
1995, in which the Company acquired nine service centers located in California
(the "Orcal Acquisition"); (iv) the acquisition of certain assets of Aqua
Chemical Sales and Delivery, Inc. in March 1995, primarily inventory and one
service center located in Illinois (the "Aqua Acquisition"); (v) the acquisition
of certain assets of Crest Distribution (a division of Aman Enterprises, Inc.)
in October 1995, primarily inventory and one service center in each of Oregon
and Washington; and (vi) the acquisition of all of the outstanding capital stock
of Steven Portnoff Corporation in November 1995, in which the Company acquired
one service center in Arizona, and the acquisition of certain assets and the
assumption of certain liabilities of Pool Mart of Nevada, Inc. in December 1995,
in which the Company acquired one service center in Nevada.
The Company derives its revenues primarily from the sale of swimming pool
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.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL (CONTINUED)
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.
The swimming pool supply industry is affected by various factors, including
general economic conditions, the level of new housing construction, weather and
consumer attitudes towards pool chemical products for environmental or safety
reasons. Although management believes that the Company's geographic diversity
could mitigate the effect of a regional economic downturn and that the
continuing maintenance and repair needs for existing swimming pools could
mitigate the effect of a general economic downturn, there can be no assurance
that the Company's results of operations and expansion plans would not be
materially adversely affected by any of such downturns.
The principal components of the Company's expenses include cost of goods sold,
which represents the amount paid to manufacturers for products, and operating
expenses, which are primarily related to labor, occupancy, commissions and
marketing. Some geographic markets serviced by the Company, particularly
California, Texas and Florida, tend to be more competitive than others. In
response to competitive pressures from any of its current or future competitors,
the Company may be required to lower selling prices in order to maintain or
increase market share, and such measures could adversely affect the Company's
gross margins and operating results.
The Company completed an initial public offering of its common stock in October
1995. The net proceeds of the offering were used primarily to reduce
indebtedness and resulted in an extraordinary charge, net of tax, in the
Company's results of operations in the fourth quarter of 1995 of approximately
$750,000 to account for the write-off of deferred financing costs and the
payment of a prepayment premium associated with extinguishing such indebtedness.
In connection with the initial public offering, the management agreement between
the Company and its principal stockholder was terminated as of the consummation
of the offering and, as a result, no management fees will be payable with
respect thereto after such time.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 year.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
--------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.7 77.8 76.9 77.6
--------------------------------
Gross profit 23.3 22.2 23.1 22.4
Warehouse expense 3.1 3.1 3.6 3.5
Selling and administrative expenses 8.6 7.7 10.8 9.8
Goodwill amortization .2 .3 .3 .4
--------------------------------
Operating income 11.4 11.1 8.4 8.7
Other income (expense):
Interest expense (.8) (2.2) (1.0) (2.8)
Amortization expense (.1) (.2) (.2) (.3)
Miscellaneous .2 - .2 -
--------------------------------
Income before income taxes 10.7% 8.7% 7.4% 5.6%
================================
9
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, 1996 and 1995.
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Net sales increased by $19.2 million, or 28.8%, to $85.9 million in the three
months ended June 30, 1996 from $66.7 million in the comparable 1995 period. An
increase in comparable service center sales of approximately 20.2% accounted for
$11.2 million of the increase. Service centers acquired in 1995 accounted for
the remainder of the increase in net sales, offset somewhat by a decrease in net
sales to third parties by Alliance.
Gross profit increased by $5.2 million, or 35.4%, to $20.0 million in the three
months ended June 30, 1996 from $14.8 million in the comparable 1995 period.
Gross profit as a percentage of net sales increased 1.1% to 23.3% in the 1996
period from 22.2% in the 1995 period. The primary reasons for this increase are
higher rebate incentives from the Company's suppliers as a result of the
Company's increased sales volumes and a focused effort to improve the operating
results of service centers which the Company believed were underperforming in
1995.
Operating expenses increased by $2.8 million, or 38.7%, to $10.2 million in the
three months ended June 30, 1996 from $7.4 million in the comparable 1995
period. Operating expenses as a percentage of sales increased 0.9% to 11.9% in
the 1996 period from 11% in the 1995 period. The increase was primarily
attributable to salaries, higher occupancy expenses in California, commissions
and other costs associated with increased employment at the service centers
acquired in 1995.
Interest and other expenses decreased to $0.6 million in the three months ended
June 30, 1996 from $1.6 million in the comparable 1995 period. The decrease was
primarily attributable to the reduction in the Company's debt with the proceeds
from the Company's initial public offering in October 1995.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net sales increased by $34.5 million, or 37.3%, to $127 million in the six
months ended June 30, 1996 from $92.5 million in the comparable 1995 period. An
increase in comparable service center sales of approximately 19% accounted for
$14.6 million of the increase. Service centers acquired in 1995 accounted for
$18.6 million of the increase in net sales, and an increase in sales at new
service centers accounted for $2.2 million of the total increase. These
increases were offset by a decrease in net sales to third parties by Alliance.
Gross profit increased by $8.6 million, or 41.3%, to $29.3 million in the six
months ended June 30, 1996 from $20.8 million in the comparable 1995 period.
Gross profit as a percentage of net sales increased 0.7% to 23.1% in the 1996
period from 22.4% in the 1995 period. The primary reasons for this increase are
higher rebate incentives from the Company's suppliers as a result of the
Company's increased sales volumes and a focused effort to improve the operating
results of service centers which the Company believed were underperforming in
1995.
Operating expenses increased by $6.1 million, or 48.0%, to $18.7 million in the
six months ended June 30, 1996 from $12.6 million in the comparable 1995 period.
Operating expenses as a percentage of sales increased by 1.1% to 14.7% in the
1996 period from 13.6% in the 1995 period. The increase was primarily
attributable to salaries, higher occupancy expenses in California, commissions
and other costs associated with increased employment at the service centers
acquired in 1995.
Interest and other expenses decreased to $1.3 million in the six months ended
June 30, 1996 from $2.9 million in the comparable 1995 period. The decrease was
primarily attributable to the reduction in the Company's debt with the proceeds
from the Company's initial public offering in October 1995.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
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, therefore, 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEASONALITY AND QUARTERLY FLUCTUATIONS (CONTINUED)
The Company expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new service centers
and acquisitions. The Company attempts to open its new stores at the end of the
fourth quarter or the beginning of the first quarter to take advantage of
preseason sales programs and the peak season.
The following table sets forth certain unaudited quarterly data for 1995 and the
first two quarters for 1996 which, in the opinion of management, reflect all
adjustments, consisting of only normal recurring adjustments, 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.
1995 1996
----------------------------------------- ----------------------
1ST 2ND 3RD 4TH 1ST 2ND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- ---------- ---------- --------- ---------- -----------
(Dollars in thousands)
Net sales $25,846 $66,667 $47,229 $21,353 $41,145 $85,867
Gross profit 5,954 14,799 10,399 5,969 9,273 20,042
Operating income 653 7,447 3,236 (1,814) 743 9,843
Net sales as a percentage
of annual net sales 16% 42% 29% 13% N/A N/A
Gross profit as a
percentage of annual gross 16% 40% 28% 16% N/A N/A
profit
Operating income as a
percentage of annual
operating income 7% 78% 34% (19)% N/A N/A
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred approximately $36.1 million of debt in connection with the
SCP Acquisition. Since the SCP Acquisition, the Company has financed its
business activities and subsequent acquisitions through borrowings under the
Amended and Restated Credit Agreement, dated as of May 30, 1996, by and among
South Central Pool Supply, Inc. (the Company's wholly owned subsidiary ("SCP
Supply")), The First National Bank of Chicago, as agent, and various lenders
from time to time party thereto (the "Credit Facility"), augmented by internally
generated cash flow, operating leases and normal trade
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
credit terms. During 1995, the Company borrowed approximately $11.1 million to
finance acquisitions. In addition, indebtedness increased by approximately
$6.6 million to meet seasonal working capital requirements. These additional
borrowings were offset by approximately $6.5 million of repayments in connection
with the initial public offering in October 1995.
During the six months ended June 30, 1996, the Company borrowed $14.5 million to
meet seasonal working capital requirements and made scheduled payments of $0.9
million required under its Credit Facility. During the six months ended June 30,
1995, the Company borrowed approximately $5.9 million under the Credit Facility
to finance the York, Orcal and Aqua acquisitions and borrowed an additional
$13.4 million under the Credit Facility to meet seasonal working capital
requirements. In addition, the seller of Orcal provided $2.7 million of
financing to the Company.
The increase from December 31, 1995 to June 30, 1996 in the amount of the
Company's inventory and accounts payable is a result of the normal seasonal
build-up of inventory in anticipation of the peak swimming pool supply selling
season. The increase in receivables during such period is primarily due to
seasonal sales.
Excluding acquisitions, the Company made capital expenditures of $363,000 and
$514,000 in the six months ended June 30, 1995 and 1996, respectively.
Currently, the Company's primary sources of working capital are cash flow from
operations and borrowings under the Credit Facility, which was amended effective
May 30, 1996. As of June 30, 1996, this Credit Facility consisted of a term loan
and a revolving credit facility. These sources have been sufficient to support
the Company's growth and to finance acquisitions. Considering the Company's
borrowing base as of June 30, 1996, the Company had approximately $5.2 million
available for borrowing under the Credit Facility, the only additional credit
source currently available to the Company.
Borrowings under the Credit Facility may, at the Company's option, bear interest
at either (i) the agent's corporate base rate or the federal funds rate plus
0.5%, whichever is higher, plus a margin ranging from 0.00% to 0.50% or
(ii) LIBOR plus a margin ranging from 1.25% to 2.00%, in each case depending on
the Company's leverage ratio. Substantially all of the assets of the Company,
including the capital stock of SCP Supply and Alliance, secure the Company's
obligations under the Credit Facility. The Credit 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
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
ability to pay dividends and make capital expenditures. As of June 30, 1996, the
Company was in compliance with all such covenants and financial ratio
requirements. The Credit Facility expires December 31, 2000.
To finance future acquisitions, the Company expects to utilize its ability to
borrow additional funds. Depending on market conditions, the Company may also
incur additional indebtedness or issue common or preferred stock (which may be
issued to third parties or to sellers of acquired businesses).
In order to consummate the BLN Acquisition, the Company will be required to
amend the Credit Facility. The Company is currently negotiating the terms of
such amendment with The First National Bank of Chicago. The Company expects that
the amendment will provide additional term and revolving loans in an amount
sufficient to provide funds for the BLN Acquisition and the Company's ongoing
working capital needs thereafter.
INFLATION
The Company does not believe that inflation has had a significant impact on its
results of operations for the periods presented.
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
Quarterly Report on Form 10-Q are forward-looking statements that involve risks
and uncertainties, including but not limited to factors related to (i) the
Company's ability to identify appropriate acquisition candidates, complete
acquisitions on satisfactory terms, or successfully integrate acquired
businesses; (ii) the sensitivity of the swimming pool supply business to cool or
rainy weather; (iii) the intense competition and low barriers to entry in the
swimming pool supply industry; (iv) the Company's ability to obtain financing on
satisfactory terms and the degree to which the Company is leveraged; (v) the
sensitivity of the swimming pool supply business to general economic conditions;
(vi) the Company's ability to remain in compliance with the numerous
environmental, health and safety requirements to which it is subject; (vii) the
risk of fire, safety and casualty losses and related liabilities claims inherent
in the storage and repackaging of chemicals sold by the Company; and (viii) 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.
15
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
10.1 Amended and Restated Credit Agreement dated as of May
30, 1996 among South Central Pool Supply, Inc., The
First National Bank of Chicago and the Institutions
party thereto as lenders.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the
three months ended June 30, 1996.
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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 6, 1996 BY: /s/ Maurice Van Dyke
-------------- -------------------------------------
Maurice Van Dyke, Chief Financial
Officer, Treasurer and Secretary and
duly authorized signatory on behalf of
the Registrant
17