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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
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT Of 1934
For the transition period from to
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Commission File Number 000-26991
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Anthony & Sylvan Pools Corporation
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(Exact name of registrant as specified in its charter)
Ohio 31-1522456
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Park Drive, Chardon, Ohio 44024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (440) 285-7946
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None
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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, as
amended, 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 N/A
--- --- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common shares, as of the latest practicable date.
Class Outstanding at August 14, 1999
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Common Shares, no par value 3,350,640 Shares
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ANTHONY & SYLVAN POOLS CORPORATION
FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1999
INDEX
Sequential
Page No.
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Part I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheets -
June 30, 1999 and December 31, 1998................ 3
Condensed Statements of Operations -
Three Months and Six Months Ended June 30, 1999
and 1998........................................... 4
Condensed Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998............ 5
Notes to Condensed Financial Statements................. 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 10-12
Part II - Other Information
Item 1. Legal Proceedings.................................. 13
Item 2. Changes in Securities.............................. 13
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 13
Item 6. Exhibits and Reports on Form 8-K................... 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANTHONY & SYLVAN POOLS CORPORATION
CONDENSED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1999 1998
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ASSETS (unaudited) (audited)
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Current Assets:
Cash and cash equivalents.............. $ 1,892 $ -
Accounts receivable, net .............. 7,475 10,307
Inventories, net ...................... 7,723 4,336
Prepayments and other ................. 2,350 2,052
Deferred income taxes.................. 1,326 1,948
-------- --------
Total current assets................ 20,766 18,643
Property, plant and equipment, net............. 8,953 7,258
Goodwill, net.................................. 27,739 28,052
Other ......................................... 559 320
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$ 58,017 $ 54,273
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities:
Current maturities of long-term debt... $ 226 $ 244
Payable to Essef Corporation........... 27,039 29,361
Accounts payable....................... 8,711 6,160
Accrued expenses....................... 14,063 10,307
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Total current liabilities 50,039 46,072
Long-term debt ................................ 145 260
Other long-term Liabilities.................... 1,200 1,200
Commitments and Contingencies.................. - -
Shareholders' Equity:
Common shares without par value,
authorized 1,000 shares,
100 shares issued and outstanding... - -
Retained earnings...................... 6,633 6,741
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Total shareholders' equity...... 6,633 6,741
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$ 58,017 $ 54,273
======== ========
See notes to condensed financial statements.
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ANTHONY & SYLVAN POOLS CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------- ------- -------
Net sales.................... $ 62,154 $ 52,415 $ 88,576 $ 70,455
Cost of sales................ 44,433 36,928 65,152 50,597
------- ------- ------- -------
Gross profit............... 17,721 15,487 23,424 19,858
Operating expenses........... 12,422 10,694 21,927 17,071
------- ------- ------- -------
Income from operations..... 5,299 4,793 1,497 2,787
Interest and other expense... 628 547 1,723 1,026
------- ------- ------- -------
Income/(loss) before
income taxes............. 4,671 4,246 (226) 1,761
Provision/(benefit) for
income taxes............... 1,821 1,659 (118) 675
------- ------- ------- ------
Net income/(loss).......... $ 2,850 $ 2,587 $ (108) $ 1,086
======== ======== ======== =======
Earnings per share:
Basic $.85 $.77 ($.03) $.32
======= ======= ======= ======
Diluted $.76 $.69 ($.03) $.29
======= ======= ======= ======
Average shares outstanding:
Basic 3,351 3,357 3,351 3,357
======= ======= ======= =======
Diluted 3,765 3,765 3,351 3,765
======= ======= ======= =======
See notes to condensed financial statements.
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ANTHONY & SYLVAN CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
Six Months Ended
June 30,
1999 1998
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Cash Flows from Operating Activities:
Net (loss)/income.................................. $ (108) $ 1,086
Adjustments to reconcile net (loss)/income to
net cash provided by operating activities
Depreciation and amortization............ 1,167 1,010
Deferred income taxes ................... 622 47
Other.................................... 157 -
Changes in operating assets and liabilities
net of assets acquired
Contract receivables.......................... 2,832 (2,558)
Inventories................................... (3,387) (2,212)
Prepayments and other......................... (537) 313
Accounts payable.............................. 2,551 915
Accrued expenses.............................. 3,708 2,265
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Net cash provided by
operating activities.................... 7,005 866
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Cash Flows from Investing Activities:
Additions to property, plant and
equipment..................................... (2,658) (1,379)
Business acquisitions.............................. - (1,813)
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Net cash used in investing activities.... (2,658) (3,192)
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Cash Flows from Financing Activities:
Net transactions with Essef Corporation............ (2,322) 2,226
Repayment of long term debt........................ (133) (192)
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Net cash (used in)/provided by
financing activities........................... (2,455) 2,034
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Net increase/(decrease) in cash and
cash equivalents.............................. 1,892 (292)
Cash and Cash Equivalents
Beginning of period.................................... - 703
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End of period.......................................... $ 1,892 $ 411
======== =======
Supplemental Cash Flow Information
Interest paid $ 1,704 $ 1,002
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Income taxes (refunded)/paid $ (118) $ 675
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Non-cash financing and investing activities:
Business acquisition with Essef Corporation
Stock charged through inter-company payable $ - $ 744
======== =======
See notes to condensed financial statements.
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ANTHONY & SYLVAN POOLS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Anthony & Sylvan Pools Corporation (the "Company") is among the
largest residential in-ground concrete pool sales and installation
businesses in the United States.
The Company was an indirect wholly-owned subsidiary of Essef
Corporation (the "Parent") for the periods presented herein. Company
management believes that the financial statements reflect all
material expenses of the Company assuming the Company was organized
as a stand-alone legal entity including specifically identifiable
costs incurred by the Parent on behalf of, and charged to, the
Company.
(2) INTERIM UNAUDITED FINANCIAL STATEMENTS
The accompanying balance sheet as of June 30, 1999 and
statements of operations and cash flows for the three-month and
six-month periods ended June 30, 1999 and 1998 are unaudited. In the
opinion of management, these interim unaudited financial statements
have been prepared on the same basis as the audited financial
statements for the year ended December 31, 1998 and include all
adjustments, consisting of only normal and recurring adjustments,
necessary for the fair presentation of the interim period. The
disclosures in the notes related to these unaudited interim financial
statements are also unaudited. The unaudited condensed statements of
operations for the three-month and six-month periods ended June 30,
1999 are not necessarily indicative of the results to be expected for
the full year.
(3) SPLIT-OFF FROM PARENT
On August 10, 1999, a third party (the "Acquiring Party")
acquired the Parent in a merger transaction that occurred
simultaneous with the Company being split-off to Parent's common
shareholders through a taxable distribution of 100% of the Company's
shares. The split-off was accomplished through the distribution of
0.25 shares of Company common stock for every share of Parent stock
held at the time of the distribution. Immediately prior to the
split-off the Company amended its articles of incorporation to
provide for the issuance of up to 30,000,000 shares of common stock.
At the time of the split-off 741,558 stock options representing
an 18.1 percent ownership interest held by persons who became
employees or directors of the Company were also split-off so that the
potential ownership these employees and directors had in the Parent
would remain consistent with their potential ownership in the
Company. Of these options 652,320 will expire in October 2000, 83,188
in September 2006 and the remaining 6,050 in July 2007. The exercise
price for these options which range from $0.20 to $3.37 was
determined based on a formula that included the Company's first day's
trading price following the split-off.
Additionally, the Company established a long-term incentive plan
under which certain employees and directors were granted options to
purchase common shares of the Company (the "Long-Term Incentive
Plan"). The number of options issued under the Long-Term Incentive
Plan cannot exceed 500,000.
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The Company, Parent and Acquiring Party have entered into
various agreements that provide for administrative services, tax
sharing and indemnification (the "Agreements"). Among other things,
these Agreements provided for the Company to pay a dividend of
$17,000,000, subject to certain adjustments, to Parent with the
balance of the inter-company payable being contributed to capital
retroactive to the split-off date. The potential adjustments to the
$17,000,000 primarily relate to the net tax benefit, as defined in
the Agreements, realized by the Parent from the exercise of employee
stock options net of the corporate tax payable from the split-off.
Pursuant to the Agreements, the calculation of adjustments to the
$17,000,000 are to be made by the Company by September 9, 1999, at
which time the Parent will have 30 days to review such calculations.
Based on preliminary calculations it is expected that none of the
$17,000,000 payment would be required to be paid by the Company.
However, such calculation is preliminary at this time and may be
subject to further refinement and agreement by the parties.
(4) EARNINGS PER SHARE
Earnings per share are computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic
earnings per share are computed by dividing net income by the number
of common shares outstanding following the split-off from the Parent.
Diluted earnings per share are based on the combined number of shares
outstanding including the assumed exercise or conversion of options.
The treasury stock method is used in computing diluted earnings per
share. As the Company's common stock was not publicly traded as of
June 30, 1999, for the purpose of calculating diluted earnings per
share under the treasury stock method, the average of the Company's
high and low stock price on it's first full day of trading on August
11, 1999, was used. The calculations were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
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(UNAUDITED) (UNAUDITED)
Numerator
Net income available to
common shareholders $2,850 $2,587 $ (108) $1,086
====== ====== ========= ======
Denominator
Weighted average common
shares outstanding 3,351 3,357 3,351 3,357
Dilutive effect of
stock options 414 408 - 408
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Denominator for net
income per diluted share 3,765 3,765 3,351 3,765
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Earnings per share:
Basic $ .85 $ .77 ($ .03) $ .32
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Diluted $ .76 $ .69 ($ .03) $ .29
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(5) RELATED PARTY TRANSACTIONS
With the exception of certain capitalized lease obligations,
prior to June 30, 1999 the Company did not have external sources of
borrowings, and as such relied upon the Parent as its primary source
of funding. The Parent provided funding through an inter-company debt
arrangement under which borrowings available to the Company were
subject to the terms, conditions and covenants of the Parent's credit
agreement, and limited to the availability thereunder. This
inter-company account was used to provide working capital and
acquisition funding and to account for the centralized cash
management program. Interest was charged at an average rate of 6.43%
for the three-month period and 6.75% for the six-month period ended
June 30, 1999. Total interest charges on the inter-company account
for the three-month and six-month periods ended June 30, 1999 were
$599,000 and $1,684,000, respectively. The inter-company account was
contributed to capital as part of the split-off (see note 3).
(6) DEBT
As required under the Agreements, subsequent to June 30, 1999
the Company separated its cash management activities from the Parent.
As such the Company can no longer be advanced funds from the Parent
while retaining its after-tax cash flow after such date. From June
30, 1999 through the split-off, the Company arranged a $5 million
bank line of credit that was not used.
On August 10, 1999, the Company replaced the line of credit with
a $35 million secured revolving credit facility ("Credit Facility")
with a group of banks. The Company's borrowing capacity under the
Credit Facility is based on its profitability and leverage. Initial
pricing under the Credit Facility will be 137.5 basis points over the
bank's libor borrowing rate with an unused line commitment fee of
37.5 basis points.
(7) BUSINESS ACQUISITIONS
In January 1998, the Company acquired the net operating assets
of Tango Pools, an installer of swimming pools in Las Vegas, Nevada,
and in August 1998 the Company acquired Pools by Andrews, Inc., an
installer of swimming pools in Florida. Consideration for these
transactions of $5,946,000, including transaction costs, was paid in
a combination of cash and the Parent's common stock. These
acquisitions were accounted for as purchases, and thus, the purchase
price has been allocated to the assets and liabilities based on their
estimated fair value. In the case of Pools by Andrews such estimates
are preliminary and may be revised at a later date. The results of
operations of the acquired entities have been included in the
Company's results since the date of acquisition.
The following unaudited proforma combined results of operations
give effect to the acquisition of Pools by Andrews as if it were
completed at the beginning of 1998. The proforma information has been
presented for comparative purposes only and does not purport to be
indicative of what would have occurred had the acquisition been made
at the beginning of 1998 or the results which may occur in the future
(dollars in thousands):
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THREE MONTHS SIX MONTHS
ENDED ENDED
6/30/98 6/30/98
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Net sales................................... $ 59,410 $ 83,794
Net income.................................. $ 2,858 $ 1,241
(8) LITIGATION
Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the
Company. In the opinion of management, the results of all such
matters will not have a material adverse effect on the Company's
financial position or results of operations and liquidity.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH
THREE MONTHS ENDED JUNE 30, 1998
Net sales of $62.2 million for the second quarter of fiscal 1999 increased 18.6%
over fiscal 1998 net sales of $52.4 million with approximately 80% of the
increase coming from businesses acquired.
Gross profit increased to $17.7 million in 1999 from $15.5 million in 1998 as a
result of the increase in net sales. Gross profit as a percentage of sales for
the three months decreased from 29.6% of net sales to 28.5% primarily as a
result of material and subcontractor cost increases.
Operating expenses consisting of sales and marketing and administrative expenses
increased by $1.7 million to $12.4 million in 1999 from $10.7 million in 1998.
As a percentage of sales operating expenses decreased from 20.4% in 1998 to
20.0% in the current period. The dollar increase was primarily attributable to
operating expenses incurred within the operations acquired with Pools by
Andrews.
Interest and other expense increased $0.1 million from $0.5 million in 1998 to
$0.6 million in the current period. The increase is attributable to increased
borrowings from Essef, the proceeds of which were used to finance operations and
the acquisition of Pools by Andrews in August 1998.
The effective tax rate remained consistent at 39.0% in both periods.
As a result of the above items, net income increased $0.2 million to $2.8
million for the three months ended June 30, 1999 from $2.6 million for the same
period in the prior year.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1998
Net sales of $88.6 million for the first six months of fiscal 1999 increased
25.7% over fiscal 1998 net sales of $70.5 million. The increase in sales was
primarily attributable to a combination of $13.7 million related to the
acquisition of Pools by Andrews completed in August of 1998; and the balance
related to increases in average selling prices and the number of pools built.
Gross profit increased to $23.4 million in 1999 from $19.9 million in 1998 as a
result of the increase in net sales. Gross profit as a percentage of sales for
the six months decreased from 28.2% of net sales to 26.4% of net sales in the
current period. The decrease is primarily attributable to material and
subcontractor cost increases.
Operating expenses consisting of sales and marketing and administrative expenses
increased by $4.9 million to $21.9 million in 1999 from $17.1 million in 1998.
As a percentage of sales operating expenses increased slightly from 24.2% in
1998 to 24.8% in the current period. The increase was attributable to operating
expenses incurred with Pools by Andrews; legal fees associated with certain
acquisition-related activities; and increased spending for sales, marketing and
lead generating activities to support the higher level of sales.
Interest and other expense increased $0.7 million from $1.0 million in 1998 to
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$1.7 million in the current period. The increase is attributable to increased
borrowings from Essef, the proceeds of which were used to finance operations and
the acquisition of Pools by Andrews in August 1998.
The effective tax rate increased from 38.3% in 1998 to 52.2% in 1999. The
increase is attributable to permanent differences in the basis of goodwill being
amortized for financial reporting and income tax purposes.
As a result of the above items, net income decreased $1.2 million to a net loss
of $0.1 million for the six months ended June 30, 1999 from net income of $1.1
million for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999 cash flow from operating activities was
$7.0 million compared with $0.9 million for the same period in 1998. The
increase came principally from a reduction in receivables and increases in
accounts payable and accrued expenses. Capital expenditures were $2.7 million
for the six-month period compared with $1.4 million for the same period last
year. The prior period also includes acquisition related payments of $1.8
million. The increase in cash flow from operating activities and reduction in
cash used in investing activities resulted in repayments of intercompany debt to
Essef of $2.3 million compared with additional advances of $2.2 million required
in the prior year.
In conjunction with the split-off from Essef, the Company has established a $35
million secured revolving credit facility with a syndicate of banks effective
August 10, 1999. The new loan matures on August 10, 2002 and may be extended in
one-year increments with the approval of the bank group. Initial pricing under
the Credit Facility will be 137.5 basis points over Libor with an unused line
commitment fee of 37.5 basis points. The Company believes that existing cash and
cash equivalents, internally generated funds and funds available under its line
of credit will be sufficient to meet its needs.
YEAR 2000 MATTERS
In 1997, as part of an overall modernization and upgrade of its information
systems, the Company began preparing its computer systems and applications for
the date change in the year 2000. To date, this process has involved modifying
or replacing certain hardware and upgrading certain software and has not
involved material costs. Management believes that substantially all of the
necessary systems and applications changes will be completed during the third
quarter of 1999, that the Company's level of preparedness is appropriate and
that the amount of additional costs, if any, needed to address the year 2000
issue will be immaterial.
The Company has initiated communications with certain of its largest suppliers
and service providers regarding year 2000 preparedness. However, management does
not believe that the Company would have any difficulty securing alternate
sources of supply in the event any of its current suppliers and service
providers experience year 2000 difficulties. In addition, because of the
seasonal nature of the Company's business, which is slowest in the first and
fourth quarters of the calendar year, management believes that any problems
arising on January 1, 2000, either with the Company's systems or the systems of
its major suppliers and service providers, can be substantially remedied before
the start of the peak swimming pool installation season.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
including the continued availability of certain resources, third party
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modification plans and other factors. However, the Company cannot guarantee that
these estimates can be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change from the matters reported in the Company's S-4 registration
statement filed with the Securities and Exchange Commission on May 18,
1999.
ITEM 2. CHANGES IN SECURITIES
No change from items previously reported in the Company's S-4
registration statement filed with the Securities and Exchange
Commission on May 18, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended Articles of Incorporation
10.10 Credit Agreement among Anthony & Sylvan Pools
Corporation and the Lending Institutions - National
City Bank.
13 Independent Accountants' Report
15 Independent Accountants' Awareness Letter
(b) Reports on Form 8-K
The following reports filed on Form 8-K are incorporated by reference:
Filed 8/11/99
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Press Release of Anthony & Sylvan Pools announcing earnings for the
second quarter ended June 30, 1999 and completion of split-off from
Essef Corporation.
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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.
Anthony & Sylvan Pools Corporation
(Registrant)
Stuart D. Neidus
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STUART D. NEIDUS
Chairman and Chief Executive Officer
(Principal Executive Officer)
Mark E. Brody
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MARK E. BRODY
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Date: August 16, 1999
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