<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
----------
Amendment No. 1
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT Of 1934
Date of Report:(Date of earliest Event reported) May 1, 1997
Commission File Number 0-15902
---------------------------------------------------------
ESSEF Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0777631
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Park Drive, Chardon, Ohio 44024
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 286-2200
------------------------------
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
<PAGE> 2
AMENDMENT TO 8-K FILING SUBMITTED MAY 15, 1997.
This amendment to the current report on Form 8-K of Essef Corporation, (the
"Company") relating to the Company's acquisition on May 1, 1997 of substantially
all of the assets (the "acquired assets")of General Aquatics, Inc. and its
wholly owned subsidiaries, Anthony and Sylvan Pools, Inc., KDI American
Products, Inc. and KDI Paragon, Inc. (collectively the "Sellers")is being filed
to include in said report the financial statements and pro-forma financial
information required pursuant to Item 7 of this report which were omitted from
the original report.
Item 7. Financial Statements
(a) Financial Statements of Business Acquired.
(i) Audited Consolidated Financial Statements of General Aquatics,
Inc. for the years ended December 31, 1996 and 1995.
(ii) Unaudited Condensed Consolidated Financial Statements of
General Aquatics, Inc. for the three months ended March 31,
1997.
(b) Pro Forma Financial Statements
(i) Description of Unaudited Pro Forma Condensed Combined
Financial Statements
(ii) Unaudited Proforma Condensed Combined Balance Sheet as of
March 31, 1997.
(iii) Unaudited Proforma Condensed Combined Statement of Operations
for the six months ended March 31, 1997.
(iv) Unaudited Proforma Condensed Combined Statement of Operations
for the year ended September 30, 1996.
(v) Notes to Unaudited Proforma Condensed Combined Financial
Statements.
<PAGE> 3
(a)(i) Audited Consolidated Financial Statements of General Aquatics, Inc. for
the years ended December 31, 1996 and 1995.
ARTHUR ANDERSEN LLP
GENERAL AQUATICS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 4
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of
General Aquatics, Inc.:
We have audited the accompanying consolidated balance sheets of General
Aquatics, Inc. (a Delaware corporation) and subsidiaries, (the Company) as of
December 31, 1996 and 1995, and the related consolidated statements of income
and shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
February 14, 1997
<PAGE> 5
GENERAL AQUATICS, INC.
----------------------
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1996 AND 1995
--------------------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,624,000 $ 1,848,000
Accounts receivable, net of allowance
for doubtful accounts of $1,000,000
and $800,000, respectively 12,560,000 7,761,000
Inventories 15,069,000 11,353,000
Prepaid expenses 906,000 479,000
------------ ------------
Total current assets 31,159,000 21,441,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 611,000 611,000
Building 2,456,000 1,885,000
Leasehold improvements 2,144,000 2,325,000
Machinery and equipment 23,398,000 19,986,000
------------ ------------
28,609,000 24,807,000
Less-- Accumulated depreciation
and amortization (16,723,000) (14,782,000)
------------ ------------
11,886,000 10,025,000
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $152,000 in 1996 2,576,000 -
Deferred income taxes, net 1,316,000 1,300,000
Other, net of accumulated amortization of
$5,000 in 1996 817,000 436,000
------------ ------------
$ 47,754,000 $ 33,202,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
<PAGE> 6
GENERAL AQUATICS, INC.
----------------------
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1996 and 1995
--------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Advances under bank Line of credit $ 5,363,000 $ 2,786,000
Current portion of long-term debt 1,762,000 2,083,000
Accounts payable 7,590,000 4,098,000
Billings in excess of costs and estimated
fees on contracts in progress 3,642,000 1,875,000
Accrued expenses:
Payroll and related 3,110,000 1,064,000
Accrued pension costs 1,031,000 1,112,000
Other 3,288,000 3,063,000
----------- -----------
Total current liabilities 25,786,000 16,081,000
----------- -----------
LONG-TERM DEBT, net of current portion 10,885,000 10,292,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock -- $1.00 par value, 500,000
authorized; none issued or outstanding - -
Capital stock -- $.01 par value, 10,000,000
authorized; issued and outstanding 1,100,000
shares and 1,000,000 shares as of December 31,
1996 and 1995, respectively 11,000 10,000
Additional paid-in capital 6,729,000 6,055,000
Retained earnings 4,343,000 764,000
----------- -----------
Total shareholders' equity 11,083,000 6,829,000
----------- -----------
$47,754,000 $33,202,000
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
<PAGE> 7
GENERAL AQUATICS, INC.
----------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
----------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
SALES $ 169,857,000 $ 104,969,000
COST OF SALES 117,834,000 73,337,000
------------- -------------
Gross profit 52,023,000 31,632,000
------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE 45,741,000 28,969,000
Income from operations 6,282,000 2,663,000
OTHER INCOME (EXPENSE):
Management fees paid to former parent - (1,600,000)
Interest expense (2,038,000) (610,000)
Other, net 767,000 311,000
------------- -------------
Income before provision for
income taxes 5,011,000 764,000
PROVISION FOR INCOME TAXES 1,432,000 -
------------- -------------
Net income $ 3,579,000 $ 764,000
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
<PAGE> 8
GENERAL AQUATICS, INC.
----------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
----------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 - $ - $ 6,065,000 $ - $ 6,065,000
Effect of Restructuring at
August 31, 1995 1,000,000 10,000 (10,000) -
Net income - - - 764,000 764,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 1,000,000 10,000 6,055,000 764,000 6,829,000
Stock issued for acquisition
(Note 1) 100,000 1,000 674,000 - 675,000
Net income - - - 3,579,000 3,579,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 1,100,000 $ 11,000 $ 6,729,000 $ 4,343,000 $11,083,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
<PAGE> 9
GENERAL AQUATICS, INC.
----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
----------------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,579,000 $ 764,000
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 3,025,000 2,034,000
Noncash interest expense 463,000 -
Provision for doubtful accounts 207,000 234,000
Loss on sale of property and equipment 4,000 1,000
Decrease (increase) in:
Accounts receivable (3,633,000) (152,000)
Inventories (643,000) (556,000)
Prepaid expenses (427,000) (20,000)
Deferred taxes (97,000) (342,000)
Other 17,000 (79,000)
Increase (decrease) in:
Accounts payable 2,455,000 1,000
Billings in excess of costs and fees on
contracts in progress 1,760,000 (17,000)
Accrued expenses (526,000) 477,000
----------- -----------
Net cash provided by operating
activities 6,184,000 2,345,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,868,000) (3,027,000)
Proceeds from sale of property and equipment 6,000 28,000
Anthony Acquisition Costs (223,000) -
----------- -----------
Net cash used in investing activities (2,085,000) (2,999,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term debt (5,042,000) -
Net borrowings on bank line of credit 2,577,000 2,786,000
Payments on trust note (475,000) (898,000)
Payments on capital lease obligation (383,000) (406,000)
----------- -----------
Net cash provided by financing
activities (3,323,000) 1,482,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 776,000 828,000
CASH AND CASH EQUIVALENTS, beginning
of year 1,848,000 1,020,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 2,624,000 $ 1,848,000
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
<PAGE> 10
GENERAL AQUATICS, INC.
----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996 and 1995
--------------------------
1. Organization and Business
-------------------------
The Company, through its divisions and subsidiaries, is involved in various
aspects of the pool industry. The main divisions and subsidiaries and their
businesses are summarized as follows:
KDI AMERICAN PRODUCTS (AMERICAN) - American manufactures underwater
lights, pumps, filters, skimmers, blowers, fittings, valves and vacuums
for swimming pools, spas, and jetted tubs. American services a global
market through direct company salesmen and a network of manufacturing
representatives and exporters. Currently, American distributes products
from its facilities in California, Florida, and New Jersey.
Manufacturing is done in Moorpark, California.
KDI ANTHONY & SYLVAN POOLS (SYLVAN) - Sylvan is involved in the
construction of residential and commercial in-ground concrete swimming
pools, as well as servicing swimming pools and retail sales of chemicals
and pool related products. Sales of pools are made directly to the
property owners and retail sales are made through company owned stores.
KDI PARAGON (PARAGON) - Paragon manufactures deck and underwater
equipment geared towards the commercial, institutional and municipal
swimming pool markets. In 1996 Paragon's manufacturing facility moved
from Pleasantville, New York to LaGrangeville, New York.
In August 1995, KDI Corporation (KDI or former parent) completed a restructuring
under which three of its operating subsidiaries (KDI American, KDI Paragon, and
KDI Sylvan) were transferred to General Aquatics, Inc. (a holding company), a
newly formed Delaware corporation. The accompanying financial statements include
the accounts of the three operating subsidiaries for the years ended December
31, 1996 and 1995 and the results of the holding company for the period from
incorporation (September 1, 1995) to December 31, 1995 and the year ended
December 31, 1996. The equity of the former parent in the three operating
subsidiaries (net of effect of the "push down" of approximately $12,350,000 of
debt) has been recorded as additional paid-in capital in the accompanying
statement of shareholders' equity. The restructure did not effect the recorded
values of the assets and liabilities in the financial statements.
On March 6, 1996, the Company purchased the assets of Anthony Pools, a division
of Anthony Industries, Inc. for $6,253,000. Anthony Pools was primarily involved
in the construction of residential pools. The purchase price was paid by the
issuance of subordinated debt of $6,178,000 (discounted to $5,355,000), warrants
to purchase 455,556 shares of common stock (at $13.56 per share), and 100,000
shares of common stock. The Company also paid $223,000 of acquisition expenses.
The purchase price was allocated to the net assets acquired, based on estimated
fair value, as follows:
<TABLE>
<S> <C>
Current Assets $ 4,446,000
Property, plant & equipment 2,517,000
Other assets 322,000
Current liabilities (3,760,000)
Goodwill 2,728,000
-----------
$ 6,253,000
===========
</TABLE>
<PAGE> 11
-2-
The acquisition has been accounted for by the purchase method and accordingly,
the results of Anthony have been included with those of the company since the
date of acquisition. Goodwill resulting from the transaction is being amortized
on a straight line basis over fifteen years.
The following table presents unaudited proforma information as if Anthony had
been acquired at the beginning of 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Sales $ 173,697,000 $ 170,318,000
============= =============
Net income (loss) $ 3,429,000 $ (951,000)
============= =============
</TABLE>
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of General
Aquatics, Inc. and its wholly owned subsidiaries (the Company) . All
intercompany balances and transactions have been eliminated.
Concentration of Risks and Uncertainties
----------------------------------------
A large portion of the Company's customer base is located in the
following states: California, Florida, New Jersey, Ohio, Pennsylvania,
Nevada and Texas. Construction and sales of pools and related products
are strongest in the spring and summer months. During 1996 and 1995, no
customers accounted for more than 10 percent of total sales.
Depreciation and Amortization
-----------------------------
Depreciation and amortization are computed using primarily the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Building 10 to 40 years
Machinery and equipment 3 to 10 years
Leasehold improvements 5 to 10 years or remaining
life of lease, if shorter
Goodwill (Note 1) 15 years
</TABLE>
The Company follows the policy of capitalizing expenditures that
materially increase the asset life and charging ordinary maintenance and
repairs to operations as incurred. When assets are sold or otherwise
disposed of, the cost and related reserves are removed from the accounts
and any resulting gain or loss is included in operations.
Revenue Recognition
-------------------
Revenues from the sale of products or services are recognized upon
shipment. Revenues from construction contracts are recognized on the
percentage-of-completion accounting method. Projected losses on
individual contracts are provided for in their entirety in the year the
loss becomes known.
<PAGE> 12
-3-
Statement of Cash Flows
-----------------------
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or
less to be cash equivalents.
The purchase of the net assets of Anthony Pools was a non-cash
transaction as debt of $5.4 million and 100,000 shares of common stock
and 455,556 warrants were issued for the purchase.
During 1996 and 1995 the Company paid $1,546,000 and $610,000 for
interest, respectively and $1,022,000 and $136,000 for income taxes,
respectively. During 1996 and 1995 the Company entered into capital
leases of $355,000 and $350,000, respectively.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
-----------------
Certain reclassifications have been made to the prior year balances to
conform with the current year presentation.
3. Inventories
-----------
Inventories include costs of materials, labor and manufacturing overhead and are
stated at the lower of cost (first-in, first-out) or market and consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Raw materials $ 7,230,000 $ 4,978,000
Work in process 2,285,000 1,517,000
Finished goods 5,554,000 4,858,000
----------- -----------
$15,069,000 $11,353,000
=========== ===========
</TABLE>
4. Advances Under Bank Line of Credit
----------------------------------
In December 1996 the Company refinanced its debt. The agreement allows for a
revolving line of credit for borrowings up to $20 million, subject to sublimits
based on accounts receivable, inventory and equipment levels. Interest is
payable at the bank's prime rate (8.25 percent at December 31, 1996) plus .75
percent or the Eurodollar rate plus 2.00 percent. The line of credit is secured
by accounts receivable, inventories and equipment and expires November 30, 1999.
As of December 31, 1996 and 1995, there was $5,363,000 and $2,786,000
outstanding under the lines of credit agreements, respectively.
<PAGE> 13
-4-
5. Notes Payable
-------------
Notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Subordinated note payable to Anthony
Industries, Inc. (See Note 1) totaling
$6,178,000 due March 1, 2001. Interest
payable semiannually at 5.61 percent
commencing September 1, 1996. Interest
charged through March 1, 1997 is converted
to notes with similar terms to the original
The note has been discounted to reflect a
9 percent interest rate $ 5,781,000 $ -
Term notes with bank, principal and
interest payable monthly bearing interest
at prime (8.25 percent at December 31,
1996) plus 1.00 percent or Eurodollar plus
2.25 through November 30, 1999 4,958,000 10,000,000
Contingent subordinated note payable to
trust for claims and administration
expenses resulting from the restructuring
(Note 1), bears no interest and obligation
expires December 31, 2005 627,000 1,102,000
Junior subordinated note payable, interest
accrues at 8 percent, principal and interest
due June 15, 2002 395,000 359,000
Capital leases (Note 6) 886,000 914,000
------------ ------------
12,647,000 12,375,000
Less -- current portion (1,762,000) (2,083,000)
------------ ------------
$ 10,885,000 $ 10,292,000
============ ============
</TABLE>
The line of credit and term notes agreements contain certain restrictive
covenants regarding the Company's financial position, which the Company
was in compliance with at December 31, 1996.
Principal payments to be made on long-term debt as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1997 $ 1,762,000
1998 945,000
1999 3,745,000
2000 19,000
2001 5,781,000
Thereafter 395,000
-----------
$12,647,000
===========
</TABLE>
<PAGE> 14
-5-
6. Commitments and Contingencies
-----------------------------
Leases
------
The Company leases several facilities under lease agreements with
varying terms expiring through Fiscal 2005. Rent expense for these
facilities for the year ended December 31, 1996 and 1995 was $3,107,000
and $2,670,000, respectively. The Company also leases certain equipment
under long-term capital leases expiring at various dates through
February 2000.
The minimum aggregate rental commitments under both capital and
operating leases, with an initial or remaining noncancelable term of
more than one year, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
----------- ----------- -----------
<S> <C> <C> <C>
Year ended December 31:
1997 $ 706,000 $ 3,070,000 $ 3,776,000
1998 205,000 1,662,000 1,867,000
1999 95,000 1,141,000 1,236,000
2000 22,000 832,000 854,000
2001 - 532,000 532,000
Thereafter - 664,000 664,000
----------- ----------- -----------
1,028,000 $ 7,901,000 $ 8,929,000
=========== ===========
Less--Amount representing interest
(8 percent to 10 percent) (142,000)
-----------
Present value of minimum lease
payments 886,000
Less--Current portion (611,000)
-----------
$ 275,000
===========
</TABLE>
As of December 31, 1995, the Company was contingently liable for
outstanding letters of credit which totaled approximately $2,500,000.
None were outstanding as of December 31, 1996.
Litigation
----------
Certain claims, suits and complaints arising out of the normal course of
business have been filed or are pending against the Company. Based on
the facts known to the Company, management believes the outcome of all
such matters will not have a material adverse affect on the financial
position of the Company.
Employment agreements
---------------------
The Company and its subsidiaries have employment agreements with certain
key executives. These agreements have terms ranging from one to two
years. Under specified circumstances, including change in control, the
agreements provide for lump sum payments upon termination of the
agreements by the Company, which payments are based upon annual
compensation.
<PAGE> 15
-6-
7. Stock Option Plan
-----------------
In October 1995 the Company established it's 1995 stock option plan (the Plan).
Under the Plan, incentive stock options can be granted at prices not less than
100 percent of the fair market value at the date of grant while nonqualified
options can be granted at not less than 85 percent of the fair market value at
the date of grant. Options are excercisable one third at grant date and one
third and one third on the first and second anniversary of the grant date,
respectively.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25, under which no compensation cost has been recognized for the employee stock
option award. Had compensation cost for the employee stock option award been
determined consistent with Statement of Financial Accounting Standards No. 123,
the Company's net income would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C> <C>
Net income As Reported $3,579,000 $764,000
Pro Forma $3,429,000 $697,000
</TABLE>
The fair value of each option grant is estimated on the date of grant using an
option pricing model with the following weighted-average assumptions used for
grants in 1996: risk-free interest rates of 8.0 percent; no expected dividend
yield; expected lives of 5 to 7 years; no expected volatility.
Stock option information with respect to the Company's stock option plan is as
follows:
<TABLE>
<CAPTION>
Common Option Aggregate
Shares Available Options Price Option
Reserved for Grant Outstanding Per share Price
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1994 - - - $ - $ -
Plan adoption 111,111 111,111 - - -
Granted - (111,111) 111,111 6.75 749,999
---------- ---------- ---------- ----- ----------
December 31, 1995 111,111 - 111,111 6.75 749,999
Authorized 125,000 125,000 - - -
Granted - (99,890) 99,890 6.75 674,258
---------- ---------- ---------- ----- ----------
December 31, 1996 236,111 25,110 211,001 $6.75 $1,424,257
========== ========== ========== ===== ==========
</TABLE>
8. Defined Contribution Plan (401k Plan)
-------------------------------------
In conjunction with the restructuring (Note 1) the Company amended and restated
the existing plan to spin-off the members accounts relating to American, Sylvan
and Paragon to the General Aquatics, Inc. Employee Retirement Benefit Plan (the
Plan). The Plan covers all eligible employees. The Company contributes an
amount not to exceed six percent of the participant's compensation. Employee
contributions become vested immediately and employer contributions vest ten
percent per year through the fourth year and twenty percent annually thereafter.
Employer contributions in fiscal 1996 and 1995 totaled approximately $572,000
and $587,000.
<PAGE> 16
-7-
9. Defined Benefit Plan
--------------------
The Company maintains a defined benefit pension plan which covers employees who
were participants as of December 31, 1991. No new participants have been
permitted to join the plan after December 31, 1991. Retirement benefits under
this plan are determined using actuarial estimates based on years of service and
the employee's total compensation. The Company's funding policy is to contribute
amounts sufficient to fund at least the minimum funding requirements set forth
in the Employee Retirement Income Security Act of 1974.
A summary of the components of the net periodic pension costs for the Company's
plan for the years ended December 31, 1996 and 1995, respectively are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Service cost-benefit earned during the period $ 18,000 $ 11,000
Interest cost on projected benefit obligation 122,000 128,000
Actual (return) loss on plan assets (139,000) 41,000
Net amortization and deferral 132,000 (79,000)
--------- ---------
Net periodic pension expense $ 133,000 $ 101,000
========= =========
</TABLE>
The assumptions used to determine pension expense were:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Discount rate 7.75% 7.25%
Range of percentage increase in compensation levels N/A N/A
Expected long-term rate of return on assets 7.75% 9.00%
</TABLE>
The following table sets forth the funded status of the plan and amount
recognized in the Company's balance sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accumulated benefits obligation $1,853,000 $ 1,988,000
Effect of future pay increase - -
----------- -----------
Projected benefit obligation 1,853,000 1,988,000
Plan assets at fair market value (822,000) (876,000)
----------- -----------
Projected benefit obligation in excess
of plan assets 1,031,000 1,112,000
Unrecognized net loss (850,000) (1,038,000)
Additional minimum pension liability 850,000 1,038,000
----------- -----------
Accrued pension costs $ 1,031,000 $ 1,112,000
=========== ===========
</TABLE>
10. Income Taxes
------------
The Company accounts for taxes to comply with the provisions of the Financial
Accounting Standards Board Statement No. 109 Accounting for Income Taxes (SFAS
109). Under SFAS 109, deferred income tax assets or liabilities are computed
based on temporary differences between the financial statements and income tax
<PAGE> 17
-8-
bases of assets and liabilities using the enacted marginal income tax rate in
effect for the year in which the differences are expected to reverse. Deferred
income tax expenses or credits are based on changes in the deferred income tax
assets or liabilities from period to period. The approximate tax effect of
temporary differences which give rise to significant deferred tax liabilities
and assets are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Depreciation and amortization $ (561,000) $ (637,000)
Reserves 1,512,000 1,442,000
Accrued liabilities 376,000 371,000
Inventory capitalization 350,000 307,000
Purchase price discount (Note 1) (380,000) -
Other 19,000 (33,000)
----------- -----------
Deferred tax asset 1,316,000 1,450,000
Valuation allowance - (150,000)
----------- -----------
Net deferred tax asset $ 1,316,000 $ 1,300,000
=========== ===========
</TABLE>
A reconciliation of the provision for income taxes to the amount computed at the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Federal income tax provision at
the statutory rate $ 1,704,000 $ 260,000
State taxes, net of federal benefit 301,000 46,000
Credit utilized (100,000) -
Utilization of net operating loss
carryforward (384,000) (306,000)
Change in valuation allowance (150,000) -
Other 61,000 -
----------- -----------
Provision for income taxes $ 1,432,000 $ -
=========== ===========
</TABLE>
11. Related Party Transactions
--------------------------
During the period that the operating subsidiaries were owned by the former
parent in 1995, the subsidiaries received charges of $2.3 million from the
former parent. The $2.3 million represented intercompany interest on the debt
"pushed down", management fees and distributions of $700,000 to the parent.
12. New Authoritative Pronouncements
--------------------------------
In March 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of", which
requires impairment losses to be recorded on long-lived assets used in
operations when indications of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The Company adopted SFAS 121 in 1996. The adoption did not have
a significant impact on the financial statements of the Company.
<PAGE> 18
(a)(ii) Unaudited Condensed Consolidated Financial Statements of General
Aquatics, Inc. for the three months ended March 31, 1997.
GENERAL AQUATICS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
- ------
<S> <C>
Current Assets
Cash and cash equivalents............... $ 2,528
Accounts receivable, net ............... 22,648
Inventories, net ....................... 17,402
Prepayments and other .................. 903
--------
Total current assets................. 43,481
Property, plant and equipment, net......... 11,712
Goodwill, net.............................. 2,390
Other ..................................... 3,097
--------
$ 60,680
========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Notes payable.......................... $ 14,912
Current maturities of long-term debt... 991
Accounts payable....................... 17,319
Accrued expenses....................... 7,487
Accrued income taxes................... (848)
--------
Total current liabilities 39,861
Long-Term Debt ............................ 11,371
Other Long-Term Liabilities................ 19
Shareholders' Equity
Common stock........................... 685
Paid in capital........................ 6,056
Retained earnings...................... 2,688
--------
Total shareholders' equity...... 9,429
--------
$ 60,680
========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 19
GENERAL AQUATICS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Dollars in thousands)
<TABLE>
<S> <C>
Net sales........................ $ 31,563
Cost of sales.................... 21,280
--------
Gross profit........... 10,283
Operating expenses............... 12,166
--------
Loss from operations... (1,883)
Interest and other expense....... 490
--------
Loss before income taxes......... (2,373)
Provision for income taxes ...... (665)
--------
Net loss............... $ (1,708)
========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 20
GENERAL AQUATICS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Dollars in thousands)
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net income................................... $ (1,708)
Adjustments to reconcile net income
to net cash used in operating activities
Depreciation and amortization............ 847
Other.................................... 103
Change in operating assets and liabilities
Accounts receivable......................... (10,088)
Inventories................................. (2,333)
Prepayments and other assets................ (962)
Accounts payable............................ 6,087
Accrued expenses............................ (791)
Other long term liabilities................. 19
--------
Net cash used in operating activities.... (8,826)
--------
Cash Flows from Investing Activities
Additions to property, plant and equipment... (534)
--------
Net cash used in investing activities. (534)
--------
Cash Flows from Financing Activities
Net proceeds from long term debt............. 9,264
--------
Net cash provided by financing activities 9,264
--------
Net decrease in cash and cash equivalents........ (96)
Cash and Cash Equivalents
Beginning of period............................ 2,624
--------
End of period.................................. $ 2,528
========
Supplemental Cash Flow Information
Interest paid $ 396
========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 21
GENERAL AQUATICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The accompanying Unaudited Condensed Consolidated Financial Statements
contain all adjustments (consisting of only normal and recurring
adjustments) which, in the opinion of management, are necessary to present
fairly the consolidated financial position of General Aquatics, Inc. (the
"Company") as of March 31, 1997, and the results of its operations and its
cash flows for the three month period ended March 31, 1997.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1996 Audited Financial Statements. The
results of operations for the three month period ended March 31, 1997 may
not necessarily be indicative of the operating results for the full year.
(2) Inventories
Inventories include costs of materials, labor and manufacturing overhead
and are stated at lower of cost ( first-in, first-out) or market and
consist of following:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31,
1997
---------
<S> <C>
Raw materials...................... $ 8,163
Work-in-process.................... 1,909
Finished goods..................... 7,330
-------
Net Inventories................. $17,402
=======
</TABLE>
(3) Subsequent Events
On May 1, 1997 the Company sold substantially all of its assets to
subsidiaries of Essef Corporation, a publicly traded Company, for
$68,550,000 plus the assumption of $8,081,000 in working capital debt. All
outstanding debt as of the date of acquisition that was not assumed by the
purchaser was paid off by the selling shareholders with the proceeds
received on the sale.
(4) Litigation
Certain claims, suits and complaints arising out of the normal course of
business have been filed or are pending against the Company. Based on the
facts known to the Company, management believes the outcome of all such
matters will not have a material adverse affect on the financial position
of the Company.
<PAGE> 22
(b) PRO FORMA FINANCIAL STATEMENTS
(b)(i) DESCRIPTION OF UNAUDITED PROFORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of March
31, 1997 and the Unaudited Condensed Combined Statements of Income for the
twelve months ended September 30, 1996 and the six months ended March 31, 1997,
give effect to the acquisition of substantially all of the assets of General
Aquatics, Inc. accounted for using the purchase method of accounting. The
Unaudited Pro Forma Condensed Combined Financial Statements are based on the
historical Consolidated Financial Statements of the Company and General
Aquatics, Inc. under the assumptions and adjustments set forth in the
accompanying notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
The Unaudited Condensed Combined Balance Sheet assumes the transactions were
consummated on March 31, 1997 and the Unaudited Condensed Combined Statements of
Operations assume that the transactions were consummated as of the beginning of
each respective period.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The allocations of the
purchase price assigned to the assets acquired, including their related
amortizations, and the liabilities assumed in the accompanying Unaudited Pro
Forma Condensed Combined Financial Statements are based upon preliminary
estimates and will be revised when the final fair value allocations are
determined.
The Unaudited Pro Forma Condensed Combined Statements of Operations exclude any
non recurring costs for merging the companies. Also excluded from the Unaudited
Pro Forma Condensed Combined Statements of Operations are any benefits that
could result from the transactions due to synergies that may have been derived
unless those benefits were clearly determinable and were realized immediately
following the acquisition.
The Unaudited Pro Forma Condensed Combined Financial Statements may not be
indicative of the results that actually would have occurred if the transactions
had been in effect on the dates indicated or which may be obtained in the
future. The Unaudited Pro Forma Condensed Combined Financial Statements are
based on the unaudited historical results and include various allocations and
"carve out" adjustments that have been made to accurately reflect the historical
results and the assets acquired and liabilities assumed.
<PAGE> 23
(b)(ii) ESSEF CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED
BALANCE SHEET
AS OF MARCH 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
General Pro Forma Pro Forma
Essef Aquatics Adjustments Combined
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ....... $ 1,297 $ 2,527 $ - $ 3,824
Accounts receivable, net ........ 52,661 21,970 - 74,631
Inventories, net ................ 22,388 16,763 352(2) 39,503
Prepayments and other ........... 1,837 885 - 2,722
--------- --------- --------- ---------
Total current assets ......... 78,183 42,145 352 120,680
Property, plant and equipment, net .... 37,826 10,824 8,200(2) 56,850
Real estate held for sale ............. 4,333 - - 4,333
Goodwill and other intangibles, net ... 13,664 2,390 35,900(2) 51,954
Other ................................. 3,619 2,959 1,343(2) 7,921
--------- --------- --------- ---------
$ 137,625 $ 58,318 $ 45,795 $ 241,738
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Notes payable ................... $ 5,859 $ 14,912 $ (14,912)(1) $ 5,859
Current maturities of LTD ....... 1,467 991 - 2,458
Accounts payable ................ 17,314 17,191 - 34,505
Accrued expenses ................ 11,033 6,245 3,000(2) 20,278
Accrued income taxes ............ 7,105 (846) - 6,259
--------- --------- --------- ---------
Total current liabilities .... 42,778 38,493 (11,912) 69,359
Long-Term Debt ........................ 36,827 11,371 66,142(1) 114,340
Deferred Income Taxes ................. 954 - - 954
Other Long-Term Liabilities ........... 1,117 19 - 1,136
Shareholders' Equity
Common Stock .......................... 21,448 685 (685)(3) 21,448
Additional Paid in Capital ............ 6,056 (6,056)(3) -
503,927 Treasury shares at cost ....... (7,962) - - (7,962)
Retained earnings ..................... 41,860 1,694 (1,694)(3) 41,860
Foreign currency translation adjustment 603 - - 603
--------- --------- --------- ---------
Total shareholders' equity ...... 55,949 8,435 (8,435) 55,949
--------- --------- --------- ---------
$ 137,625 $ 58,318 $ 45,795 $ 241,738
========= ========= ========= =========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE> 24
(b)(iii) ESSEF CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS
ENDED MARCH 31, 1997
(Dollars in thousands,
except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Essef GAI Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales ....................... $ 95,323 $ 68,290 $ $163,613
Cost of sales ................... 68,150 49,529 762(4) 118,441
-------- -------- -------- --------
Gross profit ................ 27,173 18,761 (762) 45,172
Operating expenses .............. 20,270 21,204 (2,003)(5) 39,471
-------- -------- -------- --------
Income from operations ....... 6,903 (2,443) 1,241 5,701
Interest and other expense ...... 1,485 646 3,242(1,2) 5,373
-------- -------- -------- --------
Income before income taxes ...... 5,418 (3,089) (2,001) 328
Provision for income taxes ...... 1,896 (1,271) (510)(6) 115
-------- -------- -------- --------
Income from continuing operations 3,522 (1,818) (1,491) 213
Income from discontinued
operations .................. - - -
-------- -------- -------- --------
Net income .................. $ 3,522 $ (1,818) $ (1,491) $ 213
======== ======== ======== ========
Average shares and common share
equivalents outstanding.......... 6,338,621 6,338,621
Primary Earnings Per Share
Net income.................. $ .56 $ .03
======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE> 25
(b)(iv) ESSEF CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED
SEPTEMBER 30, 1996
(Dollars in thousands,
except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Essef GAI Adjustments Combined
-------- -------- ----------- ---------
(Note 7)
--------
<S> <C> <C> <C> <C>
Net sales ....................... $193,788 $173,020 $ $366,808
Cost of sales ................... 137,267 125,108 1,594(4) 263,969
-------- -------- -------- --------
Gross profit ................ 56,521 47,912 (1,594) 102,839
Operating expenses .............. 39,589 46,281 (1,951)(5) 83,919
-------- -------- -------- --------
Income from operations ....... 16,932 1,631 357 18,920
Interest and other expense ...... 2,691 1,537 6,484(1,2) 10,712
-------- -------- -------- --------
Income before income taxes ...... 14,241 94 (6,127) 8,208
Provision for income taxes ...... 4,974 38 (2,140)(6) 2,872
-------- -------- -------- --------
Income from continuing operations 9,267 56 (3,987) 5,336
Income from discontinued
operations .................. 59 - - 59
-------- -------- -------- --------
Net income .................. $ 9,326 $ 56 $ (3,987) $ 5,395
======== ======== ======== ========
Average shares and common share
equivalents outstanding.......... 6,591,274 6,591,274
Primary Earnings Per Share
Net income.................. $1.42 $ .82
======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE> 26
(b)(v) NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Adjustment to (i) record debt proceeds used to finance the acquisition,
(ii) record interest cost of acquisition debt; and (iii) eliminate General
Aquatics debt that was not assumed.
(2) Adjustment to record the net assets acquired at fair market value and to
include certain costs incurred in connection with the acquisition. Goodwill
arising from the acquisition is assumed to be amortized over 40 years.
(3) Adjustment to eliminate the equity of General Aquatics as of date of
acquisition.
(4) Adjustment to record cost of sales and depreciation expense related to
write-up of inventory and property, plant and equipment to fair market
value (See note 2).
(5) Adjustment to eliminate non-recurring corporate expenses which were
eliminated immediately following the acquisition.
(6) Adjustment required to record pro forma income tax expense.
(7) The results of operations of General Aquatics, Inc. for the year ended
September 30, 1996, included in the pro forma financial statements differ
from their actual results due to the inclusion of the pro forma results of
Anthony Pools from the period October 1, 1995 to March 6, 1996, which was
the date it was acquired by General Aquatics, Inc. from K2.
<PAGE> 27
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.
ESSEF Corporation
(Registrant)
Thomas B. Waldin
----------------------------------
Thomas B. Waldin
President and
Chief Executive Officer
(Principal Executive Officer)
Stuart D. Neidus
----------------------------------
Stuart D. Neidus
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: July 15, 1997
