<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT Of 1934
For the quarterly period ended September 30, 2000
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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.)
6690 Beta Drive, Mayfield Village, Ohio 44143
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (440) 720-3301
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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 November 12, 2000
------------------------------- ----------------------------------------
Common Shares, no par value 3,687,470 Shares
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ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARY
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Sequential
Page No.
----------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999.......... 3
Unaudited Condensed Consolidated Statements of
Operations - Three Months and Nine Months Ended
September 30, 2000 and 1999..................... 4
Unaudited Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 2000 and 1999..................... 5
Notes to Unaudited Condensed Consolidated
Financial Statements............................. 6-8
Independent Accountants' Report...................... 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
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.................................. $ 7,853 $ 533
Contract receivables, net.................................. 7,855 8,101
Inventories, net .......................................... 5,849 5,282
Prepayments and other ..................................... 1,440 1,673
Deferred income taxes...................................... 2,291 2,584
-------- --------
Total current assets................................... 25,288 18,173
Property, Plant and Equipment, net................................ 8,375 8,107
Goodwill, net..................................................... 27,157 27,386
Other ............................................................ 1,950 1,841
-------- --------
$ 62,770 $ 55,507
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt...................... $ 78 $ 171
Accounts payable.......................................... 8,749 5,782
Accrued expenses.......................................... 14,733 11,695
Accrued income taxes...................................... 1,828 451
-------- --------
Total current liabilities 25,388 18,099
Long-term Debt ................................................... 11 4,593
Other Long-term Liabilities....................................... 1,286 2,243
Commitments and Contingencies..................................... - -
Shareholders' Equity:
Serial preferred shares no par value,
1,000,000 shares authorized,
none issued.......................................... - -
Common shares no par value,
29,000,000 shares authorized,
3,624,057 and 3,602,263 outstanding,
and 2,975,260 and 2,869,264 issued,
in 2000 and 1999, respectively........................ 29,432 27,395
Treasury shares at cost,
648,797 in 2000 and 732,999 in 1999.................... 4,055) (4,581)
Retained earnings......................................... 10,708 7,758
-------- --------
Total shareholders' equity.............................. 36,085 30,572
-------- --------
$ 62,770 $ 55,507
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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ANTHONY & SYLVAN POOLS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------ ------- -------- -----
<S> <C> <C> <C> <C>
Net sales.................... $ 63,188 $ 58,483 $160,778 $147,059
Cost of sales................ 44,985 42,637 115,642 107,786
------- ------- ------- -------
Gross profit............... 18,203 15,846 45,136 39,273
Operating expenses........... 13,501 12,497 37,289 34,427
------- ------- ------- -------
Income from operations..... 4,702 3,349 7,847 4,846
Interest and other........... (72) 62 145 1,785
------- ------- ------- -------
Income before income taxes. 4,774 3,287 7,702 3,061
Provision for income taxes... 1,660 1,315 2,773 1,197
------ ------- ------- ------
Net income................. $ 3,114 $ 1,972 $ 4,929 $ 1,864
======== ======== ======== =======
Earnings per share:
Basic $1.05 $0.53 $1.67 $0.51
======= ======= ======= ======
Diluted $0.89 $0.48 $1.42 $0.45
======= ======= ======= ======
Average shares outstanding:
Basic 2,974 3,686 2,944 3,686
======= ======= ======= =======
Diluted 3,492 4,149 3,461 4,149
======= ======= ======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
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ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income...................................... $ 4,929 $ 1,864
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............ 2,101 1,856
Deferred income taxes.................... 293 231
Other.................................... 43 214
Changes in operating assets and liabilities net of assets acquired:
Contract receivables........................ 284 1,886
Inventories................................. (567) (1,837)
Prepayments and other....................... 124 (1,345)
Accounts payable............................ 2,941 3,523
Accrued expenses and other.................. 4,230 4,940
-------- --------
Net cash provided by operating activities. 14,378 11,332
-------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment...... (1,840) (2,760)
Other........................................... (176) -
-------- --------
Net cash used in investing activities..... (2,016) (2,760)
-------- --------
Cash Flows from Financing Activities:
Net transactions with Essef Corporation........ - (2,119)
Repayment of long term debt and funding of
Other long-term liabilities.................... (5,632) (183)
Proceeds on exercise of stock options.......... 20 -
Proceeds from sale of treasury shares.......... 570 -
-------- --------
Net cash used in financing activities..... (5,042) (2,302)
-------- --------
Net increase in cash and cash equivalents.......... 7,320 6,270
Cash and Cash Equivalents:
Beginning of period.............................. 533 -
-------- --------
End of period.................................... $ 7,853 $ 6,270
======== ========
Supplemental Cash Flow Information:
Interest paid $ 180 $ 1,683
======== ========
Income taxes paid/(refunded) $ 1,396 $ (124)
======== ========
Non-cash financing and investing activities:
Former parent's inter-company debt
contributed to capital $ - $ 27,241
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
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ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Anthony & Sylvan Pools Corporation and Subsidiary (the
"Company") is among the largest residential in-ground concrete pool
sales and installation businesses in the United States and operates
in one business segment.
On August 10, 1999, a third party (the "Acquiring Party")
acquired Essef Corporation ("Essef") the Company's former parent, in
a merger transaction that included the Company being split-off to
Essef's common shareholders through a taxable distribution of 100% of
the Company's shares as part of the merger consideration. The
split-off was accomplished through the distribution of 0.25 shares of
common stock for every share of Essef common 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 1,000,000 serial preferred shares and 29,000,000 shares of
common stock.
The Company, Essef 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 Essef 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 related to the net tax benefit, as defined in the
Agreements, realized by Essef 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 has been completed
and the Company was not required to pay Essef any of the $17,000,000.
As such all of the Company's debt to Essef, which totaled $27,241,000
at the date of the split-off, was contributed to the Company's
capital increasing shareholders' equity to approximately $34,700,000
at the date of the split-off.
Company management believes that for the periods presented
herein in which the Company was owned by Essef that the financial
statements reflect all material expenses of the Company as if it was
organized as a stand-alone legal entity including specifically
identifiable costs incurred by Essef on behalf of, and charged to,
the Company.
(2) INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheet as of
September 30, 2000 and statements of operations for the three-month
and nine-month periods ended September 30, 2000 and 1999 and cash
flows for the nine-month periods ended September 30, 2000 and 1999
are unaudited. In the opinion of management, these interim unaudited
condensed consolidated financial statements have been prepared on the
same basis as the audited financial statements for the year ended
December 31, 1999 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
interim unaudited condensed consolidated financial statements are
also unaudited. The unaudited condensed consolidated statements of
operations for the three-month and nine-month periods ended September
30, 2000 are not necessarily indicative of the results to be expected
for the full year.
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(3) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding. Diluted
earnings per share is based on the combined weighted average number
of shares outstanding including the assumed exercise or conversion of
options. The treasury stock method is used in computing diluted
earnings per share. For the periods prior to the split-off from
Essef, earnings per share is calculated based on the number of shares
that would have been outstanding assuming the split-off had occurred
at the beginning of the period shown. The calculations are as follows
(in thousands except per share data):
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------ ------- ------ -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator
Net income
available to
common shareholders $ 3,114 $ 1,972 $ 4,929 $ 1,864
======= ======= ======== ========
Denominator
Weighted average common
shares outstanding 2,974 3,686 2,944 3,686
Dilutive effect of
stock options 518 463 517 463
------- ------- -------- --------
Denominator for net
Income per
diluted share 3,492 4,149 3,461 4,149
======= ======= ======== ========
Earnings per share:
Basic $1.05 $0.53 $1.67 $0.51
======= ======= ======== ========
Diluted $0.89 $0.48 $1.42 $0.45
======= ======= ======== ========
</TABLE>
(4) STOCK DIVIDENDS
On May 2, 2000, the Board of Directors authorized a 10% stock
dividend which was distributed on May 30, 2000 to shareholders of
record on May 16, 2000. The consolidated financial statements have
been retroactively restated to reflect the number of shares
outstanding following the dividend.
On October 26, 2000, the Board of Directors authorized a 10%
stock dividend to be distributed on or about November 30, 2000 to
shareholders of record on November 16, 2000. The consolidated
financial statements have not been retroactively restated to
reflect the number of shares outstanding following this dividend.
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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 Essef as its primary source of
funding. Interest was charged at an average rate of 10.6% for the
six-month period ended June 30, 1999. Total interest charges on the
inter-company account for the six-months ended June 30, 1999 were
$1,683,000. At the date of the split-off the intercompany account was
contributed to capital (see note 1). No interest was charged to the
Company by Essef between June 30, 1999 and the date of the split-off.
(6) DEBT
On August 10, 1999, the Company entered into a $35 million
revolving credit facility ("Credit Facility") with a group of banks.
The Credit Facility, secured by the assets of the Company, matures
August 10, 2002 and may be extended in one-year increments with the
approval of the bank group. The Company's borrowing capacity and
interest rates under the Credit Facility are based on its
profitability and leverage. Interest rates are charged at increments
over either Prime or Libor rates. In addition a 37.5 basis points
commitment fee is payable on the total amount of the unused
commitment. As of September 30, 2000, there were no outstanding
borrowings under the Credit Facility and the available borrowings
were $28 million. The Company is in compliance with all of its debt
covenants under the Credit Facility.
(7) 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, results of operations or liquidity.
8
<PAGE> 9
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders and Board of Directors of
Anthony & Sylvan Pools Corporation and Subsidiary
Mayfield Village, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of
Anthony & Sylvan Pools Corporation and Subsidiary (the "Company") as of
September 30, 2000, and the related condensed consolidated statements of
operations for the three-month and nine-month periods ended September 30,
2000 and 1999, and cash flows for the nine-month periods ended September 30,
2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with auditing standards generally accepted in
the United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
the Company as of December 31, 1999, and the related statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated February 18, 2000, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999 is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
October 24, 2000
9
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net sales of $63.2 million for the three-months ended September 30, 2000
increased 8.0% from $58.5 million for the same period in fiscal 1999. The
increase was primarily attributable to increases in average selling prices.
Gross profit increased $2.4 million to $18.2 million in 2000 from $15.8 million
in 1999 as a result of the increase in net sales. Gross profit as a percentage
of sales for the three months increased from 27.1% of net sales to 28.8% as a
result of increases in overall average selling prices and net material cost
reductions arising from new purchasing programs offset by other material and
labor cost increases.
Operating expenses, consisting of selling and administrative expenses, increased
by $1.0 million to $13.5 million in 2000 from $12.5 million in 1999. As a
percentage of sales operating expenses were constant at 21.4% in both periods.
The effective tax rate for the quarter was 34.8% compared with 40.0% in 1999.
The lower effective tax rate was the result of an aggregate reduction in state
income taxes in the states where Anthony & Sylvan operates.
Primarily as a result of the above items, net income for the three month period
increased from $2.0 million in 1999 to $3.1 million in 2000 and net income per
diluted share, benefiting from a lower number of shares outstanding, increased
$0.41 per share from $0.48 in 1999 to $0.89 in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net sales of $160.8 million for the nine-months ended September 30, 2000
increased 9.3% from $147.1 million for the same period in fiscal 1999. The
increase was primarily attributable to increases in average selling prices.
Gross profit increased $5.8 million to $45.1 million in 2000 from $39.3 million
in 1999 as a result of the increase in net sales. Gross profit as a percentage
of sales for the nine months increased from 26.7% of net sales to 28.1% as a
result of increases in overall average selling prices and net material cost
reductions arising from new purchasing programs offset by other material and
labor cost increases.
Operating expenses, consisting of selling and administrative expenses, increased
8.3% or $2.9 million, to $37.3 million in 2000 from $34.4 million in 1999. As a
percentage of sales, operating expenses decreased slightly from 23.4% in 1999 to
23.2% in the current period.
Interest and other expense decreased $1.7 million from $1.8 million in 1999 to
$0.1 million in 2000. The reduction in interest expense is attributable to the
change in the capital and debt structure as a result of the split off into a
stand-alone public company in August 1999. Interest was paid on external
borrowings in 2000, while the interest paid in 1999 was paid to the Company's
former Parent, Essef Corporation, through an intercompany borrowing arrangement.
The effective tax rate for the nine-month period was 36.0% in 2000 compared with
39.1% in 1999. The lower effective tax rate was the result of an aggregate
reduction in state income taxes in the states where Anthony & Sylvan operates.
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As a result of the above net income for the nine-month period increased $3.0
million to $4.9 million in 2000. Net income per diluted share, benefiting from a
lower number of shares outstanding, increased $0.97 per share to $1.42 from
$0.45 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $14.4 million for the nine months ended
September 30, 2000 compared with $11.3 million in the same period in 1999. The
increase was primarily attributable to a $3.0 million increase in net income.
Cash used in investing activities decreased from $2.8 million in the prior year
to $2.0 million in the current year, primarily as a result of lower capital
expenditures in the current year compared with the prior year. The excess of
cash from operating activities over cash used in investing activities, combined
with the proceeds from the sale of treasury shares, was used to reduce external
borrowings by $4.6 million and fund deferred compensation liabilities of $1.0
million and resulted in an increase in cash balances of $7.3 million to $7.8
million at September 30, 2000 from $.5 million at December 31, 1999.
On August 10, 1999, a third party acquired the Company's former Parent, Essef
Corporation ("Essef"), in a merger transaction that included the Company being
split-off to Essef's common shareholders as part of the merger consideration. In
accordance with the terms of the merger agreement, subsequent to June 30, 1999
the Company separated its cash management activities from Essef. Therefore, the
Company could no longer be advanced funds from Essef while retaining its
after-tax cash flow after such date. Additionally, the Company was not required
to pay Essef any of the $17.0 million that might have been due under certain
adjustment mechanisms related to the Company's split-off from Essef. As such,
all of the Company's debt to Essef, which totaled $27.2 million at the date of
the split-off, was contributed to the Company's capital at the date of the
split-off.
On August 10, 1999, the Company entered into a $35 million revolving credit
facility ("Credit Facility") with a group of banks. The Credit Facility, secured
by the assets of the Company, matures August 10, 2002 and may be extended in
one-year increments with the approval of the bank group. The Company's borrowing
capacity and interest rates under the Credit Facility are based on its
profitability and leverage. Interest rates are charged at increments over either
Prime or Libor rates. In addition, a 37.5 basis points commitment fee is payable
on the total amount of the unused commitment. As of September 30, 2000, there
were no outstanding borrowings under the Credit Facility and the available
borrowings were $28.0 million. The Company is in compliance with all of its debt
covenants under the Credit Facility.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in pricing of
equipment, materials and contract labor, and interest rates. Market risk is the
potential loss arising from adverse changes in market rates and prices, such as
commodity prices and interest rates. The Company does not enter into financial
instruments to manage and reduce the impact of some of these risks. Further, the
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes.
The Company is exposed to cash flow and fair value risk arising out of changes
in interest rates with respect to its long-term debt. Information with respect
to
11
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the Company's principal cash flows and it's weighted average interest rates on
long-term debt at September 30, 2000 is included in the Condensed Consolidated
Financial Statements.
CYCLICALITY AND SEASONALITY
The Company believes that the in-ground swimming pool leisure industry is
strongly influenced by general economic conditions and tends to experience
periods of decline during economic downturns. Since the majority of the
Company's swimming pool installation purchases are financed, pool sales are
particularly sensitive to interest rate fluctuations and the availability of
credit. A sustained period of high interest rates could result in declining
sales, which could have a material adverse effect on The Company's financial
condition and results of operations.
Historically, approximately 70% of the Company's revenues have been generated in
the second and third quarters of the year, the peak season for swimming pool
installation and use. Conversely, the Company has typically incurred net losses
during the first and fourth quarters of the year. Unseasonably cold weather or
extraordinary amounts of rainfall during the peak sales season can significantly
reduce pool purchases. In addition, unseasonably early or late warming trends
can increase or decrease the length of the swimming pool season, significantly
affecting sales and operating profit.
12
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change
ITEM 2. CHANGES IN SECURITIES
No change
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
13
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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
----------------------------------------
STUART D. NEIDUS
Chairman and Chief Executive Officer
(Principal Executive Officer)
William J. Evanson
----------------------------------------
WILLIAM J. EVANSON
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Date: November 12, 2000
14
