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 SEPTEMBER 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
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3943363
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
109 Northpark Boulevard, Covington, Louisiana 70433-5001
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(Address of principal executive offices) (Zip Code)
504-892-5521
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(Registrant's telephone number, including area code)
128 Northpark Boulevard, Covington, Louisiana 70433-5070
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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 November 11, 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 -- September 30, 1996
(Unaudited) and December 31, 1995................................. 1
Consolidated Statements of Income -- Three Months Ended
September 30, 1996 and 1995 (Unaudited) and Nine
Months Ended September 30, 1996 and 1995 (Unaudited).............. 2
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1996 and 1995 (Unaudited)..................... 3
Notes to Consolidated Financial Statements (Unaudited)--
September 30, 1996................................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
Part II. Other Information
Items 1. - 6.................................................................. 17
SCP POOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 6,099 $ 2,043
Receivables 17,502 12,090
Inventory, primarily goods purchased for resale 53,143 25,230
Prepaid expenses 945 363
Deferred income taxes 659 145
-----------------------
Total current assets 78,348 39,871
Property and equipment, net 5,846 3,470
Goodwill, net 32,739 29,725
Other assets, net 2,948 2,331
-----------------------
Total assets $119,881 $75,397
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,361 $12,726
Accrued and other current liabilities 11,207 3,075
Current portion of long-term debt 34,039 2,883
-----------------------
Total current liabilities 53,607 18,684
Deferred income taxes 1,190 843
Long-term debt, less current portion 24,947 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 10,546 2,686
-----------------------
Total stockholders' equity 40,137 32,277
-----------------------
Total liabilities and stockholders' equity $119,881 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------- ------- -------- --------
(Unaudited) (Unaudited)
Net sales $62,344 $47,229 $189,356 $139,742
Cost of sales 48,813 36,830 146,510 108,590
------------------------------------------
Gross profit 13,531 10,399 42,846 31,152
Warehouse expense 2,506 1,785 7,114 4,997
Selling and administrative expenses 6,658 5,194 20,394 14,275
Goodwill amortization 191 184 576 544
------------------------------------------
Operating income 4,176 3,236 14,762 11,336
Other income (expense):
Interest expense (780) (1,566) (2,052) (4,159)
Amortization expense (133) (171) (398) (479)
Management fees paid to majority stockholder - (63) - (188)
Miscellaneous income 295 91 577 173
------------------------------------------
(618) (1,709) (1,873) (4,653)
------------------------------------------
Income before income taxes 3,558 1,527 12,889 6,683
Provision for income taxes 1,390 628 5,029 2,603
------------------------------------------
Net income $ 2,168 $ 899 $ 7,860 $ 4,080
==========================================
Net income per share of common stock:
Primary $ .51 $ .64 $ 1.86 $ 2.91
==========================================
Fully diluted $ .50 $ .61 $ 1.83 $ 2.75
==========================================
Average shares outstanding:
Primary 4,223 1,401 4,223 1,401
==========================================
Fully diluted 4,308 1,486 4,308 1,486
==========================================
See accompanying notes.
2
SCP POOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------- -------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 7,860 $ 4,080
------------------
Adjustments to reconcile net income to net cash used in
operating activities (3,226) (3,406)
Net cash provided by operating activities 4,634 674
INVESTING ACTIVITIES
Acquisition of businesses - (6,013)
Purchase of property and equipment (554) (534)
Proceeds from sale of property and equipment 156 4
------------------
Net cash used in investing activities (398) (6,543)
FINANCING ACTIVITIES
Proceeds on long-term debt 15,577 7,200
Net borrowings (repayments) on revolving loan (13,000) 5,130
Payments on long-term debt (2,757) (750)
Issuance of common stock - 300
------------------
Net cash provided by (used in) financing activities (180) 11,880
------------------
Change in cash and cash equivalents 4,056 6,011
Cash and cash equivalents at beginning of period 2,043 844
------------------
Cash and cash equivalents at end of period $ 6,099 $ 6,855
==================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,139 $ 3,075
==================
Income taxes $ 10 $ 534
==================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Long-term debt issued to acquire businesses $ 32,691 $ 2,650
==================
See accompanying notes.
3
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
SEPTEMBER 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
nine-month periods ended September 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 September 30, 1996, SCP Pool Corporation and its wholly owned subsidiaries
(collectively referred to as the Company) maintain 73 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. On September 26, 1996, Alliance agreed to sell certain of
its assets, including inventory and fixed assets to Bio-Lab, Inc. (Bio-Lab).
(See Note 4.)
On September 26, 1996, the Company acquired from Bio-Lab, Inc. certain assets,
primarily inventory and property and equipment, of The B-L Network, Inc. (BLN),
a wholesaler of swimming pool supplies with 39 service centers in 12 states. The
total purchase price of approximately $32.7 million was financed through
promissory notes payable to Bio-Lab.
4
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
2. DESCRIPTION OF BUSINESS (CONTINUED)
The Company has accrued certain exit costs of approximately $1 million related
to the planned closing of certain BLN service centers and a reduction in the BLN
work force. As of the consummation date of the BLN Acquisition, the Company's
management had begun to assess the need for and formulate a plan to accomplish
these activities. At September 30, 1996, the Company had closed 10 service
centers. As management finalizes its plans related to these and other service
centers, adjustments to this amount may be necessary. Any such adjustments will
be recorded as adjustments to the purchase price of the BLN Acquisition.
The acquisition has been accounted for using the purchase method of accounting
and the results of operations have been included in the accompanying
consolidated financial statements since the date of acquisition. The cost of the
acquisition has been allocated on the basis of the estimated fair value of the
assets acquired. Goodwill of approximately $4 million was recorded in connection
with the BLN Acquisition. Such goodwill will be amortized over 40 years.
Unaudited pro forma results of operations of the Company for the nine months
ended September 30, 1996 and 1995, respectively, giving effect to the BLN
Acquisition as if it had occurred as of January 1, 1995, are as follows (in
thousands, except per share data):
1996 1995
----------------------
Net sales $315,578 $254,072
Gross profit $ 62,915 $ 51,327
Operating income $ 15,969 $ 13,211
Net income $ 7,528 $ 4,256
Net income per share:
Primary $ 1.78 $ 3.04
Fully diluted $ 1.75 $ 2.86
The unaudited pro forma consolidated results of operations for the nine months
ended September 30, 1996 and 1995 set for above include pro forma adjustments
for the incremental increase or decrease in amortization of goodwill and other
intangible assets, interest expense, and income taxes associated with the
acquisition. It does not reflect the anticipated savings in purchasing costs at
BLN during the periods presented, nor does it reflect cost savings from the
closure of certain BLN service centers, the amount of which has not been
determined. Furthermore, the unaudited pro forma consolidated results of
operations for the nine months ended September 30, 1995 set for above does not
give
5
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
2. DESCRIPTION OF BUSINESS (CONTINUED)
effect to the Company's initial public offering, which occurred in October 1995
(see Note 4), nor does it give effect to other acquisitions which occurred
during 1995, as if the offering and each of the acquisitions had occurred at
January 1, 1995.
In September 1996, the Company amended and restated its existing credit
agreement (as so amended, the "Credit Facility") which additional term loans of
approximately $15.6 million for a total of $25 million and increased the
revolving line of credit from $30 million to $55 million. At September 30, 1996,
the Company had no borrowings under the line of credit. See "Liquidity and
Capital Resources" section of Management's Discussion and Analysis.
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.
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):
6
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
3. EARNINGS PER SHARE (CONTINUED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1995
-------------------------------
NET INCOME
Primary:
Historical net income $ 899 $4,080
Adjustments:
Interest expense resulting from recapitalization and the
application of net proceeds of the offering 677 1,931
Management fee paid to majority stockholder 63 188
Amortization of financing fees of indebtedness repaid 43 129
Income tax effect (305) (877)
-------------------------------
Adjusted net income 1,377 5,451
Fully diluted:
Adjustment for interest expense, net of tax, on Convertible
Notes 2 6
-------------------------------
Adjusted net income $1,379 $5,457
===============================
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1995
-------------------------------
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 $ .33 $ 1.29
Fully diluted $ .32 $ 1.27
7
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
4. SUBSEQUENT EVENT
On September 26, 1996, the Company agreed to sell certain assets of Alliance,
primarily inventory and fixed assets, to Bio-Lab. At September 30, 1996 Alliance
had assets of approximately $6.8 million. For the nine months ended September
30, 1996, Alliance generated revenues and operating income of approximately $5.4
million and $300,000, respectively. The sale was completed on October 31, 1996.
Management does not expect the sale to significantly impact the Company's
operating results for the quarter ended December 31, 1996.
8
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 September 30, 1996, the Company expanded
from 8 service centers in 6 states to 73 service centers in 22 states. On
September 26, 1996, the Company acquired the B-L Network, Inc. (the BLN
Acquisition), a wholesaler of swimming pool supplies with 39 service centers in
12 states.
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.
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
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL (CONTINUED)
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 have been or will be
payable with respect thereto after such time.
10
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
---------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 78.3 78.0 77.4 77.7
---------------------------------------------
Gross profit 21.7 22.0 22.6 22.3
Warehouse expense 4.0 3.8 3.7 3.6
Selling and administrative expenses 10.7 11.0 10.8 10.2
Goodwill amortization .3 .4 .3 .4
---------------------------------------------
Operating income 6.7 6.8 7.8 8.1
Other income (expense):
Interest expense (1.3) (3.3) (1.1) (3.0)
Amortization expense (.2) (.4) (.2) (.3)
Miscellaneous .5 .1 .3 -
---------------------------------------------
Income before income taxes 5.7% 3.2% 6.8% 4.8%
=============================================
11
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 nine-month periods ended September 30, 1996 and 1995.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Net sales increased by $15.1 million, or 32.0%, to $62.3 million in the three
months ended September 30, 1996 from $47.2 million in the comparable 1995
period. An increase in comparable service center sales of approximately 18.3%
accounted for $8.3 million of the increase. New service centers and service
centers acquired in 1995 accounted for the remainder of the increase.
Gross profit increased by $3.1 million, or 30.1%, to $13.5 million in the three
months ended September 30, 1996 from $10.4 million in the comparable 1995
period. Gross profit as a percentage of net sales remained relatively unchanged,
at 21.7% in the 1996 period compared to 22.0% in the 1995 period.
Operating expenses increased by $2.2 million, or 30.6%, to $9.4 million in the
three months ended September 30, 1996 from $7.2 million in the comparable 1995
period. This increase is reflective of (1) salaries, occupancy expense and other
costs associated with new service centers, and (2) payroll and other operating
costs required to support the increased sales volume at existing service
centers. Operating expenses as a percentage of sales remained relatively
unchanged, at 15.0% in the 1996 period compared to 15.1% in the 1995 period.
Interest and other expenses decreased to $0.6 million in the three months ended
September 30, 1996 from $1.7 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net sales increased by $49.7 million, or 35.5%, to $189.4 million in the nine
months ended September 30, 1996 from $139.7 million in the comparable 1995
period. An increase in comparable service center sales of approximately 18.7%
accounted for $22.9 million of the increase. Service centers acquired in 1995
accounted for $25.0 million of the increase in net sales, and an increase in
sales at new service centers accounted for $2.1 million of the total increase.
These increases were offset by a decrease in net sales to third parties by
Alliance.
Gross profit increased by $11.6 million, or 37.5%, to $42.8 million in the nine
months ended September 30, 1996 from $31.2 million in the comparable 1995
period. Gross profit as a percentage of net sales remained relatively unchanged,
at 22.6% in the 1996 period compared to 22.3% in the 1995 period.
Operating expenses increased by $8.3 million, or 41.7%, to $28.1 million in the
nine months ended September 30, 1996 from $19.8 million in the comparable 1995
period. This increase is reflective of (1) salaries, occupancy expense and other
costs associated with the acquired service centers, and (2) payroll and other
operating costs required to support the increased sales volume at existing
service centers. Operating expenses as a percentage of sales increased to 14.8%
in the 1996 period compared to 14.2% in the 1995 period. This increase was
primarily attributable to higher occupancy costs in California.
Interest and other expenses decreased to $1.9 million in the nine months ended
September 30, 1996 from $4.7 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.
13
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.
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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEASONALITY AND QUARTERLY FLUCTUATIONS (CONTINUED)
The following table sets forth certain unaudited quarterly data for 1995 and the
first three 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 3RD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Net sales $25,846 $66,667 $47,229 $21,353 $41,145 $85,867 $62,344
Gross profit 5,954 14,799 10,399 5,969 9,273 20,042 13,531
Operating income 653 7,447 3,236 (1,814) 743 9,843 4,176
Net sales as a percentage
of annual net sales 16% 42% 29% 13% N/A N/A N/A
Gross profit as a
percentage of annual gross
profit 16% 40% 28% 16% N/A N/A N/A
Operating income as a
percentage of annual
operating income 7% 78% 34% (19)% N/A N/A N/A
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's primary sources of working capital are cash flow from
operations and borrowings under the Credit Facility, which was amended effective
September 26, 1996. As of September 30, 1996, this Credit Facility consisted of
a term loan and a revolving line of credit. The Company's borrowings under its
previous credit facility, together with cash flow from operations and seller
financing have historically have been sufficient to support the Company's growth
and to finance acquisitions. Considering the Company's borrowing base as of
September 30, 1996, the Company had approximately $24.1 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 0.0% to 1.0% or (ii) LIBOR
plus a margin ranging from 1.25% to 2.50%, in each case depending on the
Company's leverage ratio. Substantially
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
all of the assets of the Company (other than inventory acquired from BLN, which
secures the Company's obligations to BLN), including the capital stock of South
Central Pool Supply, Inc., the Company's wholly owned subsidiary, 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 ability to pay dividends and make capital expenditures. As of
September 30, 1996, the Company was in compliance with all such covenants and
financial ratio requirements. The Credit Facility expires of September 26, 2002.
During the nine months ended September 30, 1996, the Company borrowed $2.6
million to meet seasonal working capital requirements and made scheduled
payments of $2.8 million required under its previous credit facility. In
addition, the seller of BLN provided $32.7 million of financing to the Company.
This financing, which bears interest at 6%, is due in varying monthly
installments through September 1998. Approximately $11.4 million of this note
was paid in October 31, 1996, partially in connection with the sale of Alliance.
In September 1996, in connection with the execution of the Credit Facility, the
Company converted approximately $15.6 million due under its previous revolving
credit facility to the term loan portion of the Credit Facility.
During the nine months ended September 30, 1995, the Company borrowed
approximately $5.9 million under its previous credit facility to finance three
acquisitions and borrowed an additional $13.4 million under such credit facility
to meet seasonal working capital requirements. In addition, the seller of one
business acquired by the Company provided $2.7 million of financing to the
Company, of which $1.8 million remains outstanding at September 30, 1996.
The increase from December 31, 1995 to September 30, 1996 in the amount of the
Company's accounts receivable and inventory is a result of the normal seasonal
increase in receivables, and the BLN Acquisition, respectively.
Excluding acquisitions, the Company made capital expenditures of $534,000 and
$554,000 in the nine months ended September 30, 1995 and 1996, respectively.
To finance future acquisitions and the repayment of the Company's obligations to
BLN and the seller of another acquired business, 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).
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
17
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 Second Amended and Restated Credit Agreement dated as
of September 26, 1996 among South Central Pool Supply,
Inc., The First National Bank of Chicago and the
Institutions party thereto as lenders.
10.2 Asset Purchase Agreement, dated as of September 26,
1996, among South Central Pool Supply, Inc., SCP Pool
Corporation, the B-L Network, Inc. and Bio-Lab, Inc.
(incorporated by reference to the Form 8-K filed by the
Company on October 9, 1996.)
10.3 Asset Purchase Agreement, dated as of September 26,
1996, among Alliance Packaging, Inc., SCP Pool
Corporation, South Central Pool Supply, Inc. and Bio-
Lab.
10.4 Supply Agreement, among Bio-Lab, Inc., South Central
Pool Supply, Inc., and SCP Pool Corporation.
(Confidential Treatment Requested; To be filed by
amendment pending resolution of request for
Confidential Treatment)
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10.5 Supply Agreement, dated as of September 26, 1996, among
Bio-Lab, Inc., South Central Pool Supply, Inc., and SCP
Pool Corporation. (Confidential Treatment Requested; To be
filed by amendment pending resolution of request for
Confidential Treatment)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On October 9, 1996, the Company filed a report on Form 8-K
disclosing that (i) its wholly owned subsidiary, South
Central Pool Supply, Inc., had acquired substantially all
of the assets of The B-L Network, Inc. in exchange for
promissory notes of the Company in an aggregate amount of
approximately $32.7 million; and (ii) its indirect wholly
owned subsidiary, Alliance Packaging, Inc. had agreed to
sell certain assets, including inventory and fixed assets,
to Bio-Lab, Inc. The sale of assets by Alliance Packaging
was completed on October 31, 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: November 14, 1996 BY: /s/ MAURICE VAN DYKE
---------------------- -----------------------------------------
Maurice Van Dyke, Chief Financial Officer,
Treasurer and Secretary and duly authorized
signatory on behalf of the Registrant
20