<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File No. 0-15902
ESSEF CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Ohio
------------------------------------------------------
STATE OF INCORPORATION)
220 Park Drive, Chardon, Ohio
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ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
34-0777631
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(I.R.S. EMPLOYER IDENTIFICATION NO.)
44024
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(ZIP CODE)
Registrant's telephone number, including area code: (440) 286-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Shares, The Company's common stock trades on The Nasdaq
No Par Value. Stock Market under the symbol ESSF.
</TABLE>
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, and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Common Shares held by
non-affiliates of the Registrant on December 12, 1997 was $96,074,643
Indicate the number of shares outstanding of each of the issuer's classes
of common shares, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT DECEMBER 12, 1997
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<S> <C>
Common Shares, no par value.................... 10,594,406 Shares
</TABLE>
Portions of the following documents are incorporated by reference:
(1) 1997 Annual Report to Shareholders Part II
(2) Definitive Proxy Statement for the Annual Meeting of Shareholders to be held
January 29, 1998 Part III
The sequential page in this Report where the Exhibit Index appears is 15.
<PAGE> 2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ STUART D. NEIDUS
------------------------------------
Stuart D. Neidus
Executive Vice President and
Chief Financial Officer
December 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- ---------------------------------------------------
<S> <C>
/s/ THOMAS B. WALDIN Chief Executive Officer
- ---------------------------------------- (Principal Executive Officer)
Thomas B. Waldin
/s/ STUART D. NEIDUS Executive Vice President and
- ---------------------------------------- Chief Financial Officer
Stuart D. Neidus (Principal Financial Officer)
/s/ JAMES M. BIGGAR Director
- ----------------------------------------
James M. Biggar
/s/ GORDON D. HARNETT Director
- ----------------------------------------
Gordon D. Harnett
/s/ GEORGE M. HUMPHREY, II Director
- ----------------------------------------
George M. Humphrey, II
/s/ MARY ANN JORGENSON Director
- ----------------------------------------
Mary Ann Jorgenson
/s/ RALPH T. KING Director
- ----------------------------------------
Ralph T. King
</TABLE>
Date: December 24, 1997
13
<PAGE> 3
ESSEF CORPORATION
1997 FORM 10-K ANNUAL REPORT
EXHIBIT VOLUME -- TABLE OF CONTENTS
Exhibits filed with and sequentially numbered as part of the report
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<S> <C>
*10.12 Credit Agreement first amendment between Essef Corporation and National City Bank
and ABN Amro Bank N.V.
*11 Computation of Earnings Per Share
13 1997 Annual Report to Shareholders
*21 Subsidiaries of the Registrant
*23.1 Consent of Deloitte & Touche LLP
*27.1 Financial Data Schedule
- --------
* Previously filed
</TABLE>
15
<PAGE> 1
Handling
the World's
Water(TM)
ESSEF
Corporate Offices
220 Park Drive
Chardon, Ohio 44024
(440) 286-2200
http://www.essef.com
[RECYCLE LOGO] Printed on recycled paper.
<PAGE> 2
1997
Annual
Report
We Create Growth
ESSEF
Handling the World's WaterTM
<PAGE> 3
ABOUT THE COMPANY
Essef Corporation specializes in the movement, treatment, and storage of water.
Essef's clear vision for growth has driven this dynamic Company to a leadership
position in the residential, commercial, industrial, municipal and recreational
water markets of the world. As the world's largest provider of composite
components and subsystems for water and other liquids, the Water Treatment and
Systems Equipment Segment provides technologically advanced, integrated
solutions to end users just about everywhere on the planet. The Swimming Pool
and Spa Equipment Segment is a leading manufacturer of equipment including
filters, pumps, heaters, controls, valves and lights, while the Swimming Pool
Sales and Installation Segment is America's premier designer and installer of
in-ground concrete swimming pools.
1997 Essef Corporation
<PAGE> 4
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Income from Operations -
Year Net Sales (in Thousands) Year Adjusted (in Thousands)
- ---- ------------------------ ---- -----------------------
<S> <C> <C> <C>
93 $99,074 93 $7,010
94 $126,811 94 $10,947
95 $149,255 95 $10,777
96 $193,788 96 $16,592
97 $306,061 97 $26,019
<FN>
Compound annual growth rate 32.6% Compound annual growth rate 38.8%
</TABLE>
<TABLE>
<CAPTION>
EPS - Adjusted and
Year Pro-forma (in Dollars) Year Stock Price (in Dollars)
- ---- ------------------------ ---- ------------------------
<S> <C> <C> <C>
93 $0.35 93 $5.34
94 $0.55 94 $6.48
95 $0.59 95 $7.95
96 $0.71 96 $7.95
97 $1.10 97 $17.25
<FN>
Compound annual growth rate 33.2% Compound annual growth rate 34.1%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
1997 1996 Change
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<S> <C> <C> <C>
Net Sales $306,061 $193,788 + 57.9%
Income From Operations - Adjusted 26,019 16,592 + 56.8%
Income From Operations 22,519 16,592 + 35.7%
EBITDA - Adjusted 33,504 22,317 + 50.1%
Net Income 11,766 9,326 + 26.2%
Net Income Per Share .92 .71 + 29.6%
Net Income Per Share - Adjusted 1.10 .71 + 54.9%
Return on Shareholders' Equity 20.3% 17.4% + 16.7%
Book Value per Share $ 6.18 $ 5.05 + 22.4%
Stock Price at September 30 17.25 7.95 +117.0%
Market Capitalization 182,626 84,048 +117.3%
</TABLE>
Adjusted income from operations, EBITDA and net income per share exclude plant
closure costs of $3.5 million incurred in 1997. Pro-forma net income adjusts
1993 results to a fully taxed basis due to loss carryforwards utilized in that
year. All share related data has been restated to reflect the 10% stock dividend
and the 2-for-1 stock split which occurred in 1997.
<PAGE> 5
Letter to Our Shareholders
Our return on shareholders' equity was 20.3%, resulting from earnings of
$11,766,000 or $.92 per share. The EPS increased 29.6% from the previous year's
$.71. Excluding the one-time plant closing charge of $.18 per share, the EPS
increased by 54.9% to $1.10. Additionally, the current year reflects a
$2,203,000 charge for stock related incentive compensation plans and an $862,000
charge for India start-up costs. Sales set a new record at $306,061,000, an
increase of 57.9%. Growth came overwhelmingly from acquisitions this year, as
can be expected when we make such large transactions.
Our balance sheet had $87,527,000 of debt and $65,446,000 of shareholders'
equity at year-end, which is a rather more leveraged balance sheet than we have
had historically. However, our very strong cash flow and earnings expectations
should improve that situation rapidly. I do not believe a secondary stock
offering is necessary to reduce present debt levels, although it might become
more desirable with further acquisitions and would certainly improve stock
liquidity.
[PHOTO] Structural India's facility in Goa, India
1997 REVIEW
- -----------
Success at last. Qualitatively that sums up 1997 succinctly. For several
years we have been growing rapidly and profitably but have failed to persuade
investors that we were an attractive investment. Last year and again this year,
Forbes magazine recognized our achievements by selecting us as one of "Forbes
Best 200 Small Companies in America." In 1997, the market finally took notice.
Our multiple expanded and stock price more than doubled, far outpacing the
averages. While we enjoyed the recognition, we have not declared victory. We
believe our stock remains undervalued relative to our performance, and we remain
committed to providing shareholders with returns that reflect our performance.
The defining event in 1997 was the acquisition of General Aquatics, Inc.
("GAI"). For us it was a very large acquisition and a significant challenge for
Pac-Fab as well as the corporate financial staff. The acquisition has met our
expectations in every way. As a result of it, our organization is more capable,
our market position in pool equipment stronger, our earning power greater and
our long-term prospects enhanced. As well, we have a confidence that comes from
successfully undertaking a large and complex task and we feel better prepared
for further large transactions should the opportunities arise.
We are presently studying the best way for Essef shareholders to benefit from
the investment that has been made in Anthony & Sylvan, the swimming pool sales
and installation business that was acquired as part of GAI. What is
clear is that Anthony & Sylvan is the market leader in a highly fragmented
industry and, in fact, is the only company with a national presence and
substantial scale. As such, it has a unique opportunity to provide leadership to
the industry and to continue to grow. A strategy is being developed for Anthony
& Sylvan and will be implemented this year.
I am also very pleased with our start up in India. We formed a 100% owned
subsidiary, recruited an organization, built a plant, and shipped our first
pressure vessels nine months after breaking ground. This was a remarkable
accomplishment for our team, which consisted of people from different parts of
the world. While India is expected to contribute to earnings in 1998, its real
significance is much greater than that. It establishes us strongly in an
important region; it gives us a low cost manufacturing base which can be used by
all our businesses worldwide; and it gives us an ability to access the large
pool of very competent, technical people in India. India should play an
important role in our worldwide ability to compete and to grow profitably.
There were numerous other accomplishments in every
business and I am remiss in not bringing them to your attention. Accomplishments
such as the completion of a new large pressure vessel facility in Chardon, which
probably is the best large composite pressure vessel facility in the world. Or,
our new $135,000,000 bank facility which provides us with resources and
flexibility beyond anything we have had before. And, the speed with which we
were able to close our City of Industry plant and totally redesign our Moorpark
plant into world-class work cells. These and the many other accomplishments of
our talented people are inadequately summed up in my brief description and the
numbers -- 20.3% return on equity, $300 + million in sales, and $1.10 per share
in adjusted earnings. However, I have chosen to focus on the major
accomplishments above because I believe that they will be key in defining our
future.
2
<PAGE> 6
ORGANIZATION
- ------------
Recently, Elliot Ross resigned as an Executive Vice President and a Director.
Elliot's responsibilities will be assumed by Gerry Hornick, who will move from
Vice President to Executive Vice President of Essef and will continue in his
role as President of Structural North America. We know we are in most capable
hands with Gerry's leadership of our global water treatment business.
Jim Biggar was newly elected a Director in January. We were fortunate to be
able to attract a person with Jim's extensive business experience in a large and
sophisticated international environment and we are benefiting from his
contributions.
Doug Brittelle became an Executive Vice President of Essef in recognition of
his contributions to the development of Essef and the much larger size and
importance of the pool equipment segment.
Mark Brody joined us as Vice President, Finance in August. Mark brings us
extensive public company, merger and acquisition and financing experience.
His presence will enable us to deal with the needs of our larger company and
give us a significantly expanded financial capability.
OUTLOOK
- -------
We are basing our 1998 planning on a continuation of present economic
conditions in the U.S. and Europe together with a more normal spring and summer
weather pattern in the U.S. than last year. The present unrest in Southeast Asia
should not have a significant impact on us.
A full year of contribution from the acquisitions in 1997 would assure that
1998 revenues will increase to over $400 million, a sales increase of about 30%.
The profit increase will be less than that since our 1997 earnings benefited
from ownership of GAI during its most profitable months. Noteworthy is the
increased seasonality of the business because of the acquisition. Especially
difficult will be comparisons in the first two fiscal quarters when our pool
businesses have a comparatively slow period, operating close to break-even or at
a small loss.
Our extensive investments in acquisitions, product development, equipment,
marketing and facilities have positioned us well to continue our profitable
growth. To capitalize on those investments, we have a most capable and energized
organization, focused and committed to excellence in operations and to
outstanding returns to you, our shareholders.
/s/Thomas B. Waldin
Thomas B. Waldin
President and Chief Executive Officer
December 8, 1997
[PHOTO] Pac-Fab's comprehensive line of heaters, filters, pumps and accessories
are used in residential and commercial swimming pools and spas.
[PHOTO] Essef's newly acquired Anthony & Sylvan subsidiary is the world's
largest builder of in-ground concrete swimming pools.
[PHOTO] Structural's recent plant expansion in Chardon, Ohio enables us to
manufacture large pressure vessels up to 7,500 gallons in capacity.
[PHOTO] Pac-Fab valves and controls are integrated with Structural filtration
pressure vessels providing complete systems for water parks and aquariums.
3
<PAGE> 7
WATER
TREATMENT
& SYSTEMS EQUIPMENT
[PHOTO] Pressure vessels with ultra-pure water capabilities are critical to the
printed circuit board manufacturing process.
As the core of the Water Treatment and Systems Equipment Segment,
- -------------------------------------------------------------------
Essef's founding business, the Structural Group, continues to grow.
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The Group has achieved a leadership role as one of the world's leading
manufacturers of composite pressure vessels and water treatment and
systems components with seven world-class facilities located throughout the
United States, Europe and Asia. This position results from over 40 years of
dedication to innovation in the use of composite materials, a strong customer
focus, and the highest quality standards. Accomplishments in 1997 include two
new plants, major strides in engineering and development, increased global
distribution channels, and systems and equipment upgrades in every facility.
These gains continue to propel Structural's growth and extend its leadership
position for the benefit of its customers, vendors, and employees all over the
world.
The Group's most significant and impressive expansion during the year
occurred in Goa, India. Structural India broke ground in January, 1997 and began
shipping products from its 80,000 square foot facility in September, thereby
setting a new standard for speed in starting up a facility in this part of the
world. The Goa plant is equipped to manufacture the entire Structural product
line for distribution in India and to cost effectively serve Europe and Asia.
A second new plant constructed in 1997 in Chardon, Ohio, will focus
specifically on meeting the needs of the large pressure vessel market. This
facility permits Structural to manufacture, with very short lead times,
composite pressure vessels with up to 7,500 gallon capacities (96 inches in
diameter by 22 feet long) and produce large pressure vessels capable of
sustained operation at 180 degrees Fahrenheit
[PHOTO] Structural pressure vessels and Codeline(TM) reverse osmosis membrane
housings are used in water treatment, microfiltration and recycling systems.
4
<PAGE> 8
(over 80 degrees Centigrade) at pressures of 150 psi (10 bar). This product line
is cost effective, yet can accommodate the wide range of standard and
custom-ordered configurations that original equipment manufacturers, the
replacement market, and end users demand.
In 1997, Structural's worldwide research and engineering team not only
broadened the applications for its pressure vessels, but also made technical
advances in its other water systems components. Investments in fiscal 1997 have
led to the development of a broad line of pressure boost and accumulator
products for WellMate(TM), as well as new membrane housings in its CodelineTM
business unit to support a full range of reverse osmosis and ultrafiltration
applications.
Composite vessels, with their high strength-to-weight ratio, resistance to
corrosion, precise dimensional tolerance, and attractive surface appearance,
have a clear competitive advantage over steel vessels in water treatment markets
around the globe. The new equipment market is estimated to be growing at 5 to 10
percent annually with some segments growing at 20 percent per year, while the
replacement market, with a huge base of installed steel products, offers a
consistent source of growing business for composite products. To capitalize on
this growing global demand, Structural added new distribution resources and
capabilities at Structural Europe and Euroimpex, in the United States, in the
Asia-Pacific region, and in the Middle East. Structural also expanded its
multinational direct sales force by establishing three new geographic business
units with direct sales employees -- Structural India, Structural Asia-Pacific
with offices in Taiwan and China, and Structural Middle East with an office and
warehouse in Dubai.
Structural's enhanced organizational capacity, coupled with system and
equipment upgrades made in every one of its plants in fiscal 1997, greatly
strengthen the Group's ability to continue its historically strong growth.
Building on its foundation of talented employees, strong distribution
partnerships, technical expertise, and state-of-the-art products, the Group
stands poised to capitalize on opportunities for continued growth in fiscal 1998
and into the next millennium.
[PHOTO] Structural's new line of reverse osmosis system storage tanks offers
high-performance, cost-effective water storage to end users worldwide.
EXPANDING GROWTH OPPORTUNITIES
THE WATER TREATMENT AND SYSTEMS EQUIPMENT SEGMENT HAD ITS BEST YEAR EVER. The
new equipment market is estimated to be growing at 5 to 10 percent annually with
some segments growing at 20 percent per year, while the replacement market, with
a huge base of installed steel products, offers a consistent source of growing
business for composite products.
SALES INCREASED 10% TO $99,513,000
[PHOTO] New products such as Structural's composite filtration pressure vessels
offer long life and low maintenance to private, public and municipal water
filtration systems.
5
<PAGE> 9
Swimming Pool Spa & Equipment
[PHOTO] FIBERworks(TM), American Products' line of fiber optic lighting, is used
to enhance pools, spas and landscape areas.
To remain at the forefront of the pool and spa industry, this segment
- ---------------------------------------------------------------------
continually seeks ways to completely satisfy customers.
- -------------------------------------------------------
With the 1997 expansion of Pac-Fab through key strategic acquisitions, the
Company now offers customers more choices and better service than ever before.
In May 1997, Pac-Fab acquired American Products, a growing pool and spa
equipment manufacturer located in Moorpark, California, and KDI Paragon, a
leading manufacturer of deck equipment for the commercial pool market based in
LaGrangeville, New York. In September, Pac-Fab acquired selected assets of Stark
Aquatic Systems, a Seattle, Washington-based manufacturer of large fiberglass
filter systems for commercial pools, water parks, and aquariums. By integrating
American Products, Paragon, and Stark with Pac-Fab, the Group has dramatically
enhanced its position as a single-source supplier for customers' complete pool
and spa equipment needs.
These acquisitions bring added strength and diversity to the Pac-Fab line.
American Products' Ultra Flow(TM) pump, Predator(TM) and Titan(TM) RPM filters
are a fitting extension of Pac-Fab's market-leading PurexTriton(R) line of pool
and spa equipment, which includes WhisperFlow(TM) pumps, Triton(TM) filters,
and MiniMax(TM) heaters. American Products, with its fiber optic lighting
FIBERworks(TM) line, also makes lighting for pools, spas and landscape areas,
and is the leading global provider of underwater pool lighting. Pac-Fab's
ability to offer customers a comprehensive selection of high-quality,
low-maintenance swimming pool and spa equipment is further enhanced with
Compool's computer-automated control systems, which coordinate all the
functions necessary to operate a pool or spa.
Subsequent to their acquisition, Paragon and Stark Aquatics were combined
into Paragon Aquatics to create a business focused on providing commercial
equipment for pools, water parks, and aquariums.
[PHOTO] Timely introductions and innovative, new products keep Pac-Fab
positioned as an industry leader in the swimming pool and spa markets.
6
<PAGE> 10
As one of the leaders in large filtration systems, Stark's complete line of
valves and controls working with Structural's large composite tanks and
Paragon's deck equipment further enhances the ability to provide complete
systems to these markets. This combination extends both the products Pac-Fab
offers and the markets Pac-Fab serves.
Pac-Fab is swiftly integrating its new additions. The operations of its Purex
plant in City of Industry, California have been consolidated primarily into
American Products' Moorpark, California plant, with several of American
Products' lines moved to Pac-Fab's plant in Sanford, North Carolina. The
closing, which resulted in a one-time charge of $3,500,000 ($2,275,000 or $0.18
per share after tax) in 1997, is expected to increase efficiency and to generate
savings of at least $2,500,000 in 1998, with further productivity gains and
capacity utilization improvements extending into the future. With this
consolidation Pac-Fab can now offer customers a broader selection of products
with the benefits of one order, one shipment, one truck, and one invoice.
Teams in the Moorpark plant have worked to redesign assembly lines into
world-class work cells to reduce cycle times and improve productivity and
quality.
The combined product development teams of American Products and Pac-Fab have
significantly strengthened the ability to accelerate the introduction of
innovative products that create excitement and enhance enjoyment for pool and
spa owners, and are easier to install, service, and maintain.
The synergy generated by the combination of American Products, Paragon, and
Stark with Pac-Fab creates a "one-stop shop" armed with improved efficiencies,
wider cross-selling opportunities, and enhanced product development teams. The
Segment has strengthened its position in the global swimming pool and spa market
and possesses outstanding opportunities for continued growth.
[PHOTO] Integrated pool and spa equipment systems offer "one-stop shopping" for
Pac-Fab customers.
Strategic Growth Opportunities
Key strategic acquisitions, innovative new products and a focus on quality
continue to drive growth in this Segment.
Sales increased
28% to
$132,343,000
[PHOTO] Paragon Aquatics provides equipment for commercial pools, water parks,
and aquariums.
<PAGE> 11
Swimming Pool Sales & Installation
[PHOTO] With over 50 years of service -- and hundreds of thousands of satisfied
customers -- the Anthony & Sylvan name is synonymous with quality and integrity.
ANTHONY & SYLVAN
WHERE AMERICA SWIMS(TM)
When it comes to handling the world's water, Anthony & Sylvan Pools definitely
- ------------------------------------------------------------------------------
does its share.
- ---------------
Anthony & Sylvan, which joined Essef as part of the General Aquatics
acquisition in May 1997, is the world's largest builder of in-ground concrete
swimming pools. They have designed and installed over 300,000 pools since 1946,
more than any other company in the world. Headquartered in Doylestown,
Pennsylvania, Anthony & Sylvan is the benchmark for quality and experience in
the swimming pool industry. For more than 50 years they have built an
outstanding reputation for innovative, high-quality pools, and exemplify the
quality standards, management talent, and passion for growth that are core to
Essef.
Anthony & Sylvan continually looks for innovation. In 1997, creative thinking
in sales and marketing led to significant investments in sales enhancement
technology. The introduction of multimedia selling enables sales associates
armed with the latest lap-top computers to make their sales visits more
interactive, more informative, and more successful. Anthony & Sylvan also
invested in a new internet home page. Located at www.anthony-sylvan.com, this
web site has provided a significant new source for the generation of
high-quality leads for both the new pool and renovation divisions.
The Company's 31 showrooms, serving most of the major United States pool
markets, provide Anthony & Sylvan customers a friendly and relaxed atmosphere in
which to browse at their own pace. Seventeen of these showrooms boast adjacent
retail outlets, offering a complete line of complementary products, from
necessities such as heaters, filters, and lights, to the "extras" such as
flotation devices and water sports accessories.
[PHOTO] Anthony & Sylvan sales associates use multimedia for successful,
interactive, sales presentations.
8
<PAGE> 12
"WHERE AMERICA SWIMS(TM)"
The aftermarket sale of pool chemicals also allows Anthony & Sylvan to build
strong customer relationships long after a pool is installed.
Relationship-building has also fostered the rapid growth of pool renovation
and modernization as one of Anthony & Sylvan's successful operations. Customers
familiar with Anthony & Sylvan's name and quality craftsmanship turn to them
many years later when they are ready to remodel, modernize, or refurbish their
pools. Many current remodeling customers own pools that were built by Anthony &
Sylvan decades ago who value being able to rely on Anthony & Sylvan, season
after season.
From new pool sales to renovation, and from numerous financing programs to
retail "extras", Anthony & Sylvan is positioned as the one-stop shop for pool
buyers.
As the recognized leader in swimming pool design and installation, Anthony &
Sylvan has become the source for new trends and developments. By taking the time
to survey customers and elicit feedback, Anthony & Sylvan is always searching
for ways to do things better and be more responsive to customer needs. Industry
manufacturers, long aware of Anthony & Sylvan's pioneering nature, typically
approach Anthony & Sylvan first with new ideas to enhance the installation,
maintenance and efficiency of swimming pools.
The level of professionalism, the consistent approach to quality, the
attention to detail and innovation, as well as the investments being made by
Anthony & Sylvan are unmatched in the industry. This combined with over 50 years
of service, and hundreds of thousands of satisfied customers, enables customers
to have confidence in the reliability, integrity and quality of an Anthony &
Sylvan product.
INNOVATION, OPPORTUNITY & GROWTH
Anthony & Sylvan is the
world's largest builder of
in-ground concrete swimming pools,
and has designed and installed
over 300,000 pools
since 1946.
Sales for Five Months
$74,205,000
Anthony & Sylvan builds the
best pools in the world.
[PHOTO] Unmatched professionalism, detail, and innovation go into every stage of
an Anthony & Sylvan pool installation.
9
<PAGE> 13
ESSEF BUSINESS PROFILES
<TABLE>
<CAPTION>
WATER TREATMENT AND SYSTEMS EQUIPMENT
STRUCTURAL GROUP
STRUCTURAL PRESSURE VESSELS
- --------------------------------------------------------------------------------
<S> <C>
Location: Chardon, Ohio; Ontario, California
Geographic representation: North America, South America
Markets served: Commercial, Industrial, Municipal
and Residential
Distribution channels: OEMs, Distributors
and Representatives
Product offering: Composite and fiberglass pressure
vessels 6" to 96" diameter, ASME
Brands: Composite, PolyTherm, Diamondback(TM),
Bajonet(TM), ROmate(TM) and CompTec(TM)
Application(s) of products: Filtration, ion exchange, hot water and
and other liquid processing and
chemical storage
Product benefits: Lowest product life-cycle costs vs.
steel * Lightweight * Fastest delivery
CODELINE(TM) PRESSURE VESSELS
- --------------------------------------------------------------------------------
Location: Escondido, California
Geographic representation: North America, South America
Markets served: Commercial, Industrial and
Municipal
Distribution channels: Representatives,
Distributors and OEMs
Product offering: High pressure housings for
filtration and separations
Brands: Codeline(TM)
Application(s) of products: Reverse osmosis, ultrafiltration and microfiltration
of water and other liquid streams
Product benefits: Premium performance, fit & finish * ASME
code certified * Total system support
WELLMATE(TM) WATER SYSTEMS
- --------------------------------------------------------------------------------
Location: Chardon, Ohio
Geographic representation: North America, South America
Markets served: Residential, Commercial and Industrial
Distribution channels: Representatives, Distributors
and Installers
Product offering: Composite hydropneumatic
pressure vessels
Brands: WellMate(TM), Universal(TM), MiniMate(TM)
and Low-Profile(TM)
Application(s) of products: Water well and pressure
boosting systems
Product benefits: Longer life * Lower installed cost
High performance
STRUCTURAL EUROPE
- --------------------------------------------------------------------------------
Location: Herentals, Belgium
Geographic representation: Europe, Africa, Middle East
Markets served: Commercial, Industrial,
Municipal and Residential
Distribution channels: Distributors and OEMs
Product offering: Composite and fiberglass pressure vessels
and membrane housings, swimming pool
components, environmental spill
prevention products
Brands: All corporate
Application(s) of products: All corporate
Product benefits: High performance * Lower
installed cost * Fastest delivery
EUROIMPEX S.P.A.
- --------------------------------------------------------------------------------
Location: Milan, Italy
Geographic representation: Italy, France, Spain
Markets served: Residential, Commercial and Industrial
Distribution channels: OEMs
Product offering: Full range of components for the residential,
commercial and industrial water treatment business
Brands: Distributors of AUTOTROL(TM) valves and
all corporate brands
Application(s) of products: Water processing and treatment
Product benefits: Longer life * Lower installed cost
One source for all components
STRUCTURAL ASIA-PACIFIC
- --------------------------------------------------------------------------------
Location: Taipei, Taiwan
Geographic representation: Asia-Pacific region
Markets served: Commercial, Industrial,
Municipal and Residential
Distribution channels: Distributors and OEMs
Product offering: Composite and fiberglass pressure vessels
and membrane housings, swimming pool
components, environmental spill
prevention products
Brands: All corporate
Application(s) of products: All corporate
Product benefits: High performance * Lower
installed cost * Fastest delivery
STRUCTURAL INDIA PRIVATE LTD
- --------------------------------------------------------------------------------
Location: Goa, India
Geographic representation: India and surrounding regions
Markets served: Residential, Commercial, Industrial and Municipal
Distribution channels: OEMs and Distributors
Product offering: Composite and fiberglass pressure vessels
and membrane housings, swimming pool
components, environmental spill
prevention products
Brands: All corporate
Application(s) of products: All corporate
Product benefits: Lowest product life-cycle costs vs.
steel * Lightweight * Fastest delivery
One source for all components
</TABLE>
10
<PAGE> 14
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
SWIMMING POOL SALES AND INSTALLATION
ENPAC CORPORATION
Location: Eastlake, Ohio
Geographic representation: North America, Southeast Asia, Australia,
New Zealand
Markets served: Commercial and Industrial
Distribution channels: Distributors
Product offering: Spill prevention and containment products
Brands: Poly-Overpack(R), Poly-SafetyPack(R), Poly-Dolly(TM),
Poly-Spillpallet(TM), Poly-Funnel(TM)
Application(s) of products: Industrial and environmental spill prevention
and containment
Product benefits: Cost savings through reduced waste and
liability and reclaimed materials * Achieves
government compliance * Longer life and
weatherability
ANTHONY & SYLVAN
Headquarters: Doylestown, Pennsylvania
Geographic representation: U.S.
Sales offices: Atlanta, Baltimore, Charlotte, Connecticut, Dallas,
Houston, Las Vegas, New Jersey, Northern California,
Orlando, Southeastern Pennsylvania, Southeastern New York,
Southern California, Washington, DC
Distribution channels: Direct Sales
Product offering: Sales and installation of new in-ground
swimming pools and spas. Renovation of
existing pools and spas. Pool supplies
Industry standing: Largest installer of residential in-ground
concrete pools in the United States
Product benefits: Enhances people's leisure time enjoyment by
providing fun, exercise and relaxation for
today's busy American lifestyle
SWIMMING POOL AND SPA EQUIPMENT
PAC-FAB
EAST
- --------------------------------------------------------------------------------
Location: Sanford, North Carolina
Geographic representation: Eastern U.S., Canada, South America, Europe
Markets served: Residential
Distribution channels: Distributors and Installers
Product offering: Swimming pool components including high
pressure/high flow pumps, sand filters, cartridge
filters, diatemaceous earth filters, heaters, valves,
drains, fittings, underwater lights, skimmers and
accessories
Brands: WhisperFlo(TM), Ultra-Flow(TM), Challenger(TM),
Maxim(TM), Pinnacle(TM), Laguna(TM), Triton(TM),
Eclipse(TM), Tagelus(TM), Meteor(TM), Nautilus(TM),
Quantum(TM), Warrior(TM), Titan(TM), Star(TM),
Sea Horse(TM), Predator(TM), MiniMax(TM),
Amerlite(TM), Aqua-Light(TM), Aqua-Lumin(TM),
Hi-Lite(TM), Spa Brite(TM), FIBERworks(TM),
Bermuda(TM)
Application(s) of products: Residential swimming pools and spas
Product benefits: High performance * Stronger,
longer lasting * Complete pool systems
System warranty packages
High-performance, energy efficient products
WEST
- --------------------------------------------------------------------------------
Location: Moorpark, California
Geographic representation: Western U.S., Pacific Rim
Markets served: Residential pools, spas and jetted bathtubs
Distribution channels: Distributors and Installers
Product offering: Swimming pool components
including high pressure/high flow pumps, sand
filters, cartridge filters, diatemaceous earth
filters, heaters, valves, drains, fittings,
underwater lights, skimmers and accessories
Brands: WhisperFlo(TM), Ultra-Flow(TM), Challenger(TM),
Maxim(TM), Pinnacle(TM), Laguna(TM), Triton(TM),
Eclipse(TM), Tagelus(TM), Meteor(TM), Nautilus(TM),
Quantum(TM), Warrior(TM), Titan(TM), Star(TM),
Sea Horse(TM), Predator(TM), MiniMax(TM),
Amerlite(TM), Aqua-Light(TM), Aqua-Lumin(TM),
Hi-Lite(TM), Spa Brite(TM), FIBERworks(TM),
Bermuda(TM), Luxury Jets(TM)
Application(s) of products: Residential swimming pools and spas
Product benefits: High performance * Stronger,
longer lasting * Complete pool systems
System warranty packages
High-performance, energy efficient products
COMPOOL
Location: Mountain View, California
Geographic representation: Worldwide
Markets served: Commercial and Residential
Distribution channels: Distributors and Installers
Product offering: Computer-automated control
systems and valves
Brands: Compool
Application(s) of products: Commercial and residential swimming
pools and spas
Product benefits: Pool/spa automation made easy
Complete automation systems
PARAGON AQUATICS
Location: LaGrangeville, New York
Geographic representation: Worldwide
Markets served: Commercial Pools, Water Parks and Aquariums
Distribution channels: Distributors, Dealers and Installers
Product offering: Swimming pool deck and underwater equipment
including diving towers, starting platforms,
lifeguard chairs, stainless steel railings, underwater
windows, lights and speakers, water polo goals,
grab rails, ladders, high capacity composite sand
filters, valves and computer automated controls
Brands: Paraflyte, Quickset, Competitor, Varsity,
Sturdee, Rover, Lookout, Stark Aquatics
Application(s) of products: Commercial, institutional, competition
swimming pools, water parks and aquariums
Product benefits: High quality * Strong technical and customer
support * Custom design capabilities * Short
lead times
</TABLE>
11
<PAGE> 15
SELECTED FINANCIAL DATA
Essef Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------------
(Dollars in thousands except per share data) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
OPERATING DATA
<S> <C> <C> <C> <C> <C>
Net Sales $306,061 $193,788 $149,255 $126,811 $ 99,074
Income from Operations - Adjusted 26,019 16,592 10,777 10,947 7,010
Income from Operations 22,519 16,592 10,777 10,947 7,010
Net Income 11,766 9,326 7,511 6,995 6,173
Net Income - Adjusted and Pro-forma 14,041 9,326 7,511 6,995 4,355
Per Share:
Net Income 0.92 0.71 0.59 0.55 0.49
Net Income - Adjusted and Pro-forma 1.10 0.71 0.59 0.55 0.35
Return on Shareholders' Equity 20.3% 17.4% 16.8% 20.6% 22.2%
BALANCE SHEET DATA
Total Assets $216,883 $111,248 $106,624 $ 74,171 $ 55,199
Working Capital 14,148 15,201 18,725 18,212 8,316
Long Term Debt 81,658 17,512 20,788 16,246 8,819
Total Debt 87,527 25,978 27,693 17,682 10,887
Shareholders' Equity 65,446 53,338 51,426 37,896 30,076
Debt to Total Capital 57.2% 32.8% 35.0% 31.8% 26.6%
OTHER DATA
Cash Flow from Operations $ 33,077 $ 16,403 $ 11,287 $ 8,317 $ 9,470
Capital Expenditures 16,058 6,580 8,387 4,906 3,662
Depreciation and Amortization 7,621 5,467 5,896 5,147 4,858
Engineering and Development 5,834 4,874 3,925 3,168 2,581
EBITDA - Adjusted 33,504 22,317 17,274 16,733 12,745
Average Fully Diluted Shares
Outstanding 12,797 13,182 12,828 12,634 12,570
Market Price of Stock
High 17.75 8.41 8.41 8.30 6.36
Low 7.84 6.59 6.36 5.23 4.66
At September 30 17.25 7.95 7.95 6.48 5.34
Market Capitalization at September 30 182,626 84,048 90,785 69,385 57,158
<FN>
"Adjusted" amounts exclude plant closure costs of $3.5 million incurred in 1997. "Pro-forma" net income adjusts
1993 results to a fully taxed basis due to loss carryforwards utilized in that year. All share related data has
been restated to reflect the 10% stock dividend and the 2-for-1 stock split which occurred in 1997.
</TABLE>
<PAGE> 16
QUARTERLY FINANCIAL INFORMATION
Essef Corporation and Subsidiaries
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------- --------------- --------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
(Dollars in thousands except
per share data)
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $40,209 $37,750 $55,599 $51,965 $102,652 $59,359 $107,601 $44,714
Gross Profit 10,055 9,520 15,227 13,551 30,241 16,259 30,668 11,907
Income from Operations 1,639 1,740 5,044 4,909 11,495 7,296 4,341 2,647
Net Income 682 890 2,840 2,697 6,404 4,363 1,840 1,376
Net Income Per Share .05 .07 .22 .20 .50 .33 .14 .11
Market Price of Stock
High 8.41 8.41 10.88 8.07 12.25 7.95 17.75 8.41
Low 7.84 6.59 7.84 7.16 9.88 6.59 12.00 7.16
<FN>
Note: The sum of the quarterly net income per share does not equal the annual amount reported. Net income per share is
computed independently for each quarter and the full year is based on respective weighted average common shares
outstanding.
</TABLE>
<TABLE>
<CAPTION>
EBITDA - Adjusted Net Income - Adjusted and
Year (in Thousands) Year Pro-forma (in Thousands)
- ---- ------------------------ ---- -------------------------
<S> <C> <C> <C>
93 $12,745 93 $ 4,355
94 $16,733 94 $ 6,995
95 $17,274 95 $ 7,511
96 $22,317 96 $ 9,326
97 $33,504 97 $14,041
<FN>
Compound annual growth rate 27.3% Compound annual growth rate 34.0%
</TABLE>
<TABLE>
<CAPTION>
International & Export Capital Expenditures
Year Sales (in Thousands) Year (in Thousands)
- ---- ------------------------ ---- ---------------------
<S> <C> <C> <C>
93 $19,103 93 $ 3,662
94 $23,472 94 $ 4,906
95 $29,926 95 $ 8,387
96 $45,395 96 $ 6,580
97 $50,795 97 $16,058
<FN>
Compound annual growth rate 27.7%
</TABLE>
13
<PAGE> 17
MANAGEMENT'S DISCUSSION
& ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ESSEF CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
- ---------------------
1997 COMPARED TO 1996
Net sales in 1997 of $306,061,000 increased 57.9% from 1996 net sales of
$193,788,000. The acquisition of General Aquatics, which was completed in May
1997, represented approximately 90% of the increase while growth within each of
the existing businesses accounted for the balance. Sales growth was 9.9% in the
Water Treatment and Systems Equipment Segment which resulted from expansion into
new markets and new product lines. Swimming Pool and Spa Equipment sales
increased 28.2%. Excluding the impact of acquisitions, sales in this segment
grew by only 2.2% as a result of poor weather conditions during the spring and
relatively low overall growth in the pool and spa equipment market. The Swimming
Pool Sales and Installation Segment, a new segment acquired with General
Aquatics, represented approximately 66% of the total sales growth for the year.
The Company's global expansion strategy and improving conditions in Europe
resulted in an increase of 11.9% in export sales and sales by the Company's
foreign operations over the prior year. Without an unfavorable foreign exchange
rate export and foreign geographic sales would have increased by 19.2%.
Gross profit increased by $34,954,000 in 1997 over 1996 with a corresponding
increase in gross margin from 26.4% of sales to 28.2%. These increases arose
principally from the businesses acquired in the General Aquatics transaction.
Operating expenses of $63,672,000 in 1997 increased by $29,027,000 over 1996 or
from 17.9% to 20.8% as a percentage of sales. The principal reasons for this
increase include: non-recurring costs of $3,500,000 relating to the closing of
one of Pac-Fab's plants, which is expected to generate annual savings of
approximately $2,500,000; accruals of $2,203,000 related to incentive based
employee stock options and other similar plans as a result of the Company's 117%
improvement in stock price and 29.6% increase in earnings per share over the
prior year; start-up costs of $862,000 related to the construction of a new
facility in Goa, India; a $625,000 increase in goodwill amortization principally
related to the General Aquatics acquisition; and a higher percentage of selling
and administrative costs inherent in General Aquatics' businesses. Looking
forward, future expenses related to employee stock options and stock-based
incentive plans will be dependent on changes in the Company's stock price,
earnings per share and the number of such options and awards.
Interest expense increased by $1,671,000 or 64% to $4,281,000. This was the
result of increased borrowings which were used to finance the acquisition of
General Aquatics and the Company's global expansion strategy which resulted in
the construction of a new facility in Goa, India and the expansion of its
facility in Chardon, Ohio.
The Company's effective tax rate was 35.0% in 1997 and 1996.
The above items resulted in net income of $11,766,000, an increase of 26.2%
compared to $9,326,000 in 1996, and an increase in earnings per share of 29.6%
from $.71 in 1996 to $.92 in 1997.
1996 COMPARED TO 1995
Net sales in 1996 of $193,788,000 increased 29.8% from 1995 net sales of
$149,255,000. The 1995 acquisitions of Codeline, Compool and Euroimpex
represented approximately 60.4% of the increase while growth within each of the
existing businesses accounted for the balance. The Company's emphasis on global
expansion resulted in sales growth in its foreign operations and exports of
51.7% over the
prior year.
Gross profit increased by $14,172,000 in 1997 over 1996 principally due to the
growth in sales arising both from acquisitions and internally. Gross margins
increased from 24.8% of sales to 26.4% as a result of cost reduction programs
and a $1,430,000 reduction in depreciation expense due to a change in asset
lives.
Operating expenses of $34,645,000 in 1996 increased by $8,357,000 principally
due to operating expenses associated with acquired businesses. As a percentage
of sales operating expenses increased slightly from 17.6% to 17.9%. The increase
was attributable primarily to the costs of integrating acquired businesses and
their different cost structures, new system start-up costs, greater investments
in engineering and development, and higher employee related costs.
14
<PAGE> 18
Interest expense increased by $535,000 or 25.8% to $2,610,000. This increase was
the result of an approximate 23.9% increase in average outstanding borrowings
and an increase in the effective interest rate of approximately 75 basis points.
The Company's effective tax rate of 35.0% was lower than the 1995 rate of 36.0%
due to the impact of foreign taxes.
The above items resulted in a 55.5% increase in net income from continuing
operations and a 24.2% increase in net income while earnings per share from
continuing operations increased 52.2% and earnings per share increased 20.3%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In May 1997, the Company acquired certain assets and assumed certain liabilities
of General Aquatics, Inc. for $77,883,000, including transaction costs. This
acquisition significantly changed the Company's cash flow and capital structure.
To finance this acquisition and to repay existing loans the Company terminated
its existing bank loan facility and obtained, through a new bank group, an
unsecured $135,000,000 multi-currency revolving loan facility ("Credit
Facility"). The new Credit Facility matures April 30, 2002 and may be extended
in one-year increments with the approval of the bank group. The Credit Facility
includes commitment reductions at specified dates and for events throughout the
term of the loan, however, the commitment does not reduce below $100,000,000.
At September 30, 1997, funded debt was $87,527,000, an increase of $61,549,000
from September 30, 1996. This increase came as a result of the financing of the
General Aquatics acquisition. Funded debt represents 57.2% of funded debt plus
shareholders' equity at September 30, 1997, compared to 32.8% at September 30,
1996.
During 1997, cash flow provided from operating activities improved from
$16,403,000 to $33,077,000, representing an increase of 102%. The principal
reason for the substantial improvement in operating cash flow is the higher net
income and related cash flow arising from the General Aquatics acquisition.
Capital expenditures in 1997 totaled $16,058,000 compared to $6,580,000 in 1996
and were funded by cash flows from operating activities and external borrowings.
The increase in capital expenditures relates primarily to the construction of a
new manufacturing plant in Goa, India as part of the Company's global expansion
strategy, expansion of a plant in Chardon, Ohio to increase capacity in the
production of large composite tanks and from capital expenditures associated
with the General Aquatics businesses after their acquisition. The Company
expects to continue its policy of not paying cash dividends in order to retain
the earnings and cash for the future expansion of the business.
The Company believes that funds available under its Credit Facility and funds
generated from operations will be sufficient to satisfy its anticipated
operating needs and capital improvements in fiscal 1998.
The Company is involved in various claims and lawsuits incidental to its
business, including product liability claims which are covered by insurance
after certain deductibles. As discussed in Note 16 of the Consolidated Financial
Statements, one such lawsuit involves claims against the Company and other
defendents which exceeds $200 million, for which management believes it has
meritorious defenses. Also, although the Company believes that its reserves are
adequate, a significant increase in the aggregate amount of claims could have an
adverse effect on the deductible level or upon the Company's ability to obtain
product liability coverage for certain product lines. While the ultimate result
of these contingencies cannot be predicted with certainty, based on information
presently available, management does not expect these matters to have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
PRIVATE SECURITIES LITIGATION REFORM ACT
- ----------------------------------------
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking statements. Certain information
included in this Annual Report and other materials filed or to be filed with the
Securities and Exchange Commission (as well as information included in oral or
other written statements made or to be made by the Company) contains statements
that are forward-looking. Such statements may relate to plans for future
expansion, plant integrations and consolidations, business development
activities, other capital spending, financing or the effects of regulation and
competition. Such information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to those relating to product development activities, actual
costs of plant integrations and consolidations, dependence on existing
management, global economic and market conditions, and changes in federal or
state laws.
15
<PAGE> 19
CONSOLIDATED STATEMENTS
OF INCOME
ESSEF CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
(Dollars in thousands except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 306,061 $ 193,788 $ 149,255
Cost of sales 219,870 142,551 112,190
- -------------------------------------------------------------------------------------------------
Gross profit 86,191 51,237 37,065
Operating expenses:
Engineering and development 5,834 4,874 3,925
Selling 29,804 13,890 11,937
Administrative 24,534 15,881 10,426
Plant closure costs 3,500 -- --
- -------------------------------------------------------------------------------------------------
Total operating expenses 63,672 34,645 26,288
- -------------------------------------------------------------------------------------------------
Income from operations 22,519 16,592 10,777
Interest expense 4,281 2,610 2,075
Other expense (income), net 136 (258) (601)
- -------------------------------------------------------------------------------------------------
Income before income taxes 18,102 14,240 9,303
Provision for income taxes 6,336 4,984 3,350
Income from continuing
operations 11,766 9,256 5,953
Income from discontinued
operations -- 70 1,558
- -------------------------------------------------------------------------------------------------
Net income $ 11,766 $ 9,326 $ 7,511
=================================================================================================
Per share information:
Income from continuing
operations $ .92 $ .70 $ .46
Net income .92 .71 .59
=================================================================================================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
ESSEF CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30,
----------------------------
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 1,668 $ 2,620
Accounts receivable, less allowance
for doubtful accounts of $3,048
and $1,319, respectively 39,512 29,017
Inventories 34,597 19,445
Prepayments and other 2,173 1,645
- -----------------------------------------------------------------------------------------------------------------
Total current assets 77,950 52,727
Property, Plant and Equipment, at cost
Land 1,285 363
Buildings 25,389 17,805
Machinery and equipment 87,527 69,193
- -----------------------------------------------------------------------------------------------------------------
114,201 87,361
Less accumulated depreciation 50,381 49,064
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 63,820 38,297
Other Assets
Goodwill, net 60,349 13,402
Deferred income taxes 5,706 --
Real estate held for sale 4,333 4,333
Other 4,725 2,489
- -----------------------------------------------------------------------------------------------------------------
Total other assets 75,113 20,224
- -----------------------------------------------------------------------------------------------------------------
$ 216,883 $ 111,248
=================================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings $ 5,320 $ 6,999
Current maturities of long-term debt 549 1,467
Accounts payable 20,028 12,247
Accrued expenses 29,237 12,481
Accrued income taxes 8,668 4,332
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 63,802 37,526
Long-Term Debt 81,658 17,512
Deferred Income Taxes -- 1,890
Other Long-Term Liabilities 5,977 982
Shareholders' Equity
Preferred shares no par value, authorized 1,000,000 shares, none issued -- --
Common shares no par value, authorized 15,000,000 shares, issued 11,090,431
and 11,069,885 shares in 1997 and 1996, respectively 32,234 21,444
Treasury shares at cost, 503,927 shares in 1997 and 1996 (7,962) (7,962)
Retained earnings 41,099 38,338
Foreign currency translation adjustment 75 1,518
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 65,446 53,338
- -----------------------------------------------------------------------------------------------------------------
$216,883 $111,248
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ESSEF CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------------------
Cumulative
Common Retained Translation Treasury
(Dollars in thousands) Stock Earnings Adjustment Stock Total
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Balance-
September 30, 1994 $ 15,995 $ 21,501 $ 1,350 $ (950) $ 37,896
Net income -- 7,511 -- -- 7,511
Exercise of stock
options (19,683 shares) 96 -- -- -- 96
Issuance of shares
for acquisition
(681,980 shares) 5,270 -- -- -- 5,270
Foreign currency
translation adjustment -- -- 653 -- 653
- -----------------------------------------------------------------------------------------------------
Balance-
September 30, 1995 21,361 29,012 2,003 (950) 51,426
Net income -- 9,326 -- -- 9,326
Exercise of stock
options (38,366 shares) 83 -- -- -- 83
Purchase of treasury
shares (402,597 shares) -- -- -- (7,012) (7,012)
Foreign currency
translation adjustment -- -- (485) -- (485)
- -----------------------------------------------------------------------------------------------------
Balance-
September 30, 1996 21,444 38,338 1,518 (7,962) 53,338
Net income -- 11,766 -- -- 11,766
Exercise of stock
options (20,546 shares) 132 -- -- -- 132
10% Stock Dividend 9,005 (9,005) -- -- --
Stock option accrual 1,653 -- -- -- 1,653
Foreign currency
translation adjustment -- -- (1,443) -- (1,443)
- -----------------------------------------------------------------------------------------------------
Balance-
September 30, 1997 $ 32,234 $ 41,099 $ 75 $ (7,962) $ 65,446
- -----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 22
CONSOLIDATED STATEMENTS
OF CASH FLOWS
ESSEF CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 11,766 $ 9,326 $ 7,511
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 7,621 5,467 5,896
Other 1,236 637 (587)
Changes in operating assets and
liabilities
Accounts receivable 9,107 (3,508) (1,929)
Inventories 423 (2,604) (1,046)
Prepayments and other (537) 613 (1,484)
Accounts payable (6,587) 3,762 243
Accrued expenses 7,861 747 (1,428)
Accrued and deferred income taxes 2,187 1,963 4,111
- ------------------------------------------------------------------------------------------
Net cash provided by operating
activities 33,077 16,403 11,287
- ------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property, plant and
equipment (16,058) (6,580) (8,387)
Business acquisitions (81,387) (936) (1,577)
Proceeds from sale of business 5,071 -- --
Other, net (857) (1,449) (1,785)
- ------------------------------------------------------------------------------------------
Net cash used in investing
activities (93,231) (8,965) (11,749)
- ------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from long-term debt 114,533 -- 5,900
Repayments of long-term debt (54,173) (3,331) (9,556)
(Decrease) increase in short-term
borrowings (1,290) 1,572 5,383
Treasury stock acquired -- (7,012) --
Proceeds from exercise of stock
options 132 83 96
- ------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 59,202 (8,688) 1,823
- ------------------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (952) (1,250) 1,361
Cash and cash equivalents
Beginning of year 2,620 3,870 2,509
- ------------------------------------------------------------------------------------------
End of year $ 1,668 $ 2,620 $ 3,870
==========================================================================================
Supplemental Cash Flow Information
Interest paid $ 3,705 $ 2,450 $ 2,168
Income taxes paid, net 4,165 3,080 126
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESSEF CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Essef Corporation and subsidiaries (the "Company") is a leading worldwide
supplier of composite components and subsystems for the movement, storage and
treatment of water. The Company's products are used in the residential,
commercial, industrial and municipal markets. Additionally, the Company operates
one of the largest residential in-ground pool sales and installation businesses
in the United States. The Company reports its business in three segments: Water
Treatment and Systems Equipment, Swimming Pool and Spa Equipment and Swimming
Pool Sales and Installation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company. All
significant intercompany items have been eliminated.
REVENUE RECOGNITION
Revenues from the sale of products are recognized upon shipment. Revenues from
contracts related to the installation of swimming pools are recognized on the
percentage-of-completion accounting method. Projected losses on individual
contracts are provided for in their entirety in the period the loss becomes
known.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short term investments with initial
maturities of three months or less to be cash equivalents.
DEPRECIATION AND AMORTIZATION
Depreciation is computed using the straight-line method for financial reporting
purposes while accelerated methods are used for tax reporting purposes. The
Company determined, effective October 1, 1995, that principally due to
preventative maintenance programs, asset lives were extended. As a result, the
Company prospectively changed the lives of certain assets, reducing depreciation
expenses by approximately $1,430,000 in 1997 and 1996. ($930,000 after tax, or
$.07 per share for each year.)
FINANCIAL INSTRUMENTS
The Company has financial instruments which consist primarily of cash and cash
equivalents, receivables, payables and debt instruments. The Company has
determined that the estimated fair value of its financial instruments
approximates carrying value.
GOODWILL
Goodwill arising from business acquisitions is amortized using the straight-line
method over forty years. Accumulated amortization at September 30, 1997 and 1996
was $1,425,000 and $465,000, respectively.
The Company continually evaluates goodwill to assess impairment.
INCOME TAXES
The provision for income taxes includes federal, foreign, state and local taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets.
EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average number of
outstanding common shares and equivalents (stock options) during the periods.
20
<PAGE> 24
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated at
current exchange rates and the results of operations are translated at the
average exchange rates during the periods. Adjustments resulting from these
translations are recorded as a separate component of shareholders' equity.
USE OF ESTIMATES
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 period. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts in order to be
consistent with the presentation for the current year.
(2) BUSINESS ACQUISITIONS
On May 1, 1997, the Company acquired certain assets and assumed certain
liabilities of General Aquatics, Inc. for $77,883,000, including transaction
costs. The acquisition has been accounted for as a purchase, and thus, the
purchase price has been allocated to the assets and liabilities based on their
preliminary estimated fair value as of the date of acquisition. Such estimates
may be revised at a later date. The results of operations have been included in
the Company's results since the date of acquisition. The cost in excess of the
fair value of the net assets acquired is being amortized on a straight-line
basis over forty years.
General Aquatics consisted of three business units, American Products, KDI
Paragon and Anthony & Sylvan Pools. American Products and KDI Paragon design and
manufacture swimming pool and spa equipment for the residential, commercial,
institutional and municipal markets and have been integrated into the Swimming
Pool and Spa Equipment Segment. Anthony & Sylvan Pools is now reflected as the
Company's Swimming Pool Sales and Installation Segment.
The following table is a summary of the transaction:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Fair value of identifiable assets acquired $65,018
Costs in excess of net assets acquired 44,889
Less liabilities assumed (32,024)
- --------------------------------------------------------------------------------
Net cash paid for acquisition $77,883
================================================================================
</TABLE>
The following unaudited pro-forma combined results of operations give effect to
the acquisition as though it was completed at the beginning of each period
shown. The pro-forma 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 the earliest period presented, or of
results which may occur in the future.
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $394,102 $366,808
Net income 9,182 5,395
Earnings per share .72 .41
</TABLE>
In September 1997, the Company also acquired selected assets of Stark Aquatic
Systems, a manufacturer of large fiberglass filter systems for application in
commercial pools, water parks and aquariums. The transaction does not have a
significant impact on pro-forma results.
21
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESSEF CORPORATION AND SUBSIDIARIES
(CONTINUED)
(3) PLANT CLOSURE
In July 1997, as a result of the acquisition of General Aquatics, the Company
commenced closing its Pac-Fab plant in City of Industry, California. Most of
this plant's operations were consolidated into the General Aquatics plant in
Moorpark, California. The costs associated with the plant closure resulted in a
non-recurring charge of $3,500,000 ($2,275,000 after tax, or $.18 per share) in
the fourth quarter of 1997.
(4) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for 36% and 59% of inventories in 1997 and
1996, respectively. The balance of the Company's inventories are valued using
the first-in, first-out (FIFO) method. A summary of inventories at September 30
follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
FIFO Cost:
Raw materials $ 11,932 $ 10,023
Work-in-process 10,033 2,266
Finished goods 13,857 8,529
- --------------------------------------------------------------------------
35,822 20,818
Excess of FIFO over LIFO cost (1,225) (1,373)
- --------------------------------------------------------------------------
Net inventories $ 34,597 $ 19,445
==========================================================================
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consists of the following at September 30:
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation $11,093 $ 5,059
Customer advance payments 3,738 --
Other 14,406 7,422
- --------------------------------------------------------------------------------
$29,237 $12,481
================================================================================
</TABLE>
(6) SHORT-TERM BORROWINGS
The Company's European subsidiaries have working capital lines of credit of
approximately $15,000,000. At September 30, 1997 and 1996, approximately
$3,312,000 and $3,249,000, respectively, was outstanding. At September 30, 1997
interest was at rates ranging from 4% to 10.375%. In addition, a note payable on
demand of $2,008,000 and $3,750,000 relating to an acquisition was outstanding
at September 30, 1997 and 1996, respectively. The interest rate on the note is
6%.
22
<PAGE> 26
(7) LONG-TERM DEBT
Long-term debt consists of the following at September 30:
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facilities $ 79,700 $ 12,425
Term loan -- 6,428
Other loans 2,507 126
- ------------------------------------------------------------------------------
82,207 18,979
Less current maturities (549) (1,467)
- ------------------------------------------------------------------------------
$ 81,658 $ 17,512
==============================================================================
</TABLE>
In May 1997, the Company terminated its existing bank loans and obtained,
through a new bank group, an unsecured $135,000,000 multi-currency revolving
loan facility ("Credit Facility"). The Credit Facility matures April 30, 2002
and may be extended in one year increments with the approval of the bank group.
The Credit Facility includes commitment reductions at specified dates and for
events throughout the term of the loan, however, the commitment does not reduce
below $100,000,000. Interest rates are based on increments over the lead bank's
base lending rate or LIBOR (or foreign currency equivalent) rate. A 25 basis
point facility fee is payable on the total amount of the commitment. The Company
is in compliance with all of its covenants under its Credit Facility. As of
September 30, 1997, interest rates for the Credit Facility ranged from 6.16% to
6.31%.
In May 1997, the Company entered into an interest rate swap agreement with a
commercial bank which
effectively converts $30,000,000 of its floating rate debt to a fixed rate of
6.33%. The effective interest rate on this fixed portion of debt was 7.08% at
September 30, 1997. The Company does not use derivatives for trading purposes.
Aggregate maturities of long-term debt are the following: 1998, $549,000; 1999,
$422,000; 2000, $346,000; 2001, $267,000; 2002, $79,873,000; and $750,000
thereafter.
(8) INCOME TAXES
The provision for income taxes is calculated based upon the following components
of income before taxes:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $16,750 $11,850 $ 7,395
Foreign 1,352 2,390 1,908
- --------------------------------------------------------------------------
$18,102 $14,240 $ 9,303
==========================================================================
</TABLE>
The significant components of the provision for income taxes are as follows at
September 30:
(Dollars in thousands)
1997 1996 1995
- ----------------------------------------------------------------------------
[S] [C] [C] [C]
Current
Federal $ 7,149 $ 4,396 $ 2,125
Foreign 432 (277) (311)
State 959 546 226
- ----------------------------------------------------------------------------
Total current 8,540 4,665 2,040
- ----------------------------------------------------------------------------
Deferred
Federal (1,860) 294 1,199
Foreign (51) (25) (116)
State (293) 50 227
- ----------------------------------------------------------------------------
Total deferred (2,204) 319 1,310
- ----------------------------------------------------------------------------
$ 6,336 $ 4,984 $ 3,350
============================================================================
23
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESSEF CORPORATION AND SUBSIDIARIES
(CONTINUED)
(8) Income Taxes (Continued)
Significant components of the Company's deferred tax assets and liabilities are
as follows at September 30:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Nondeductible accruals $ 9,255 $ 2,735
Tax credits and net operating
loss carryforwards 599 627
Deferred tax liabilities
Book basis of fixed assets in
excess of tax basis (3,700) (5,115)
Other (448) (137)
- -------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 5,706 $(1,890)
=====================================================================================
</TABLE>
The consolidated tax provision differs from the tax provision computed at the
statutory United States tax rate of 35% for 1997 and 34% for prior years for the
following reasons:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at statutory
Federal rate $ 6,336 $ 4,842 $ 3,163
State income taxes 433 557 453
Foreign tax differential (92) (597) (426)
Other items, net (341) 182 160
- ---------------------------------------------------------------------------
$ 6,336 $ 4,984 $ 3,350
===========================================================================
</TABLE>
(9) LEASES
The Company leases certain of its facilities and equipment. Total rental
expenses were $3,100,000, $1,521,000 and $982,000 in 1997, 1996 and 1995,
respectively. Minimum annual rental commitments for the next five years under
non-cancelable operating leases are the following: 1998, $4,623,000; 1999,
$3,994,000; 2000, $3,279,000; 2001, $2,463,000; 2002, $409,000; and $334,000
thereafter.
(10) RETIREMENT PLANS
The Company maintains defined contribution plans covering substantially all of
its domestic employees. Participants are permitted to make pretax contributions
to the plans as a percentage of compensation. The Company matches participant
contributions, up to specified limits. In certain plans the Company also
contributes a specified percentage of annual compensation of participants. Total
Company contributions were approximately $2,066,000, $1,514,000 and $1,155,000
in 1997, 1996 and 1995, respectively.
(11) BUSINESS SEGMENT INFORMATION
The Company operates in three industry segments: Water Treatment and Systems
Equipment; Swimming Pool and Spa Equipment; and Swimming Pool Sales and
Installation. The Water Treatment and Systems Equipment Segment manufactures
products for moving, storing and treating water in residential, commercial,
industrial and municipal water supply systems. The Swimming Pool and Spa
Equipment Segment manufactures pumps, filters, heaters, controls, valves, lights
and other components for swimming pools and spas. Geographically, the operations
of the two previously described segments are located principally in the United
States, Europe and most recently India. The Swimming Pool Sales and Installation
Segment installs residential concrete in-ground swimming pools in most major
markets in the United States.
24
<PAGE> 28
The following tables contain a summary of information by industry segment and by
geographic area.
BY INDUSTRY SEGMENT
(Dollars in thousands)
<TABLE>
<CAPTION>
Income Depreciation
Industry Net From Total Capital and
Segment Year Sales Operations Assets Expenditures Amortization
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Water Treatment 1997 $ 99,513 $10,003 $ 63,413 $11,725 $4,057
and Systems 1996 90,587 10,222 60,377 4,458 3,513
Equipment 1995 63,304 5,046 58,239 5,509 3,372
Swimming Pool 1997 132,343 12,267(1) 81,616 3,536 2,682
and Spa 1996 103,201 9,273 44,318 2,080 1,925
Equipment 1995 85,951 8,289 40,465 2,833 2,480
Swimming Pool 1997 74,205 8,143 58,044 760 851
Sales and 1996 -- -- -- -- --
Installation 1995 -- -- -- -- --
Corporate 1997 -- (4,394) 13,810 37 31
1996 -- (2,903) 6,553 42 29
1995 -- (2,558) 7,920 45 44
Consolidated 1997 306,061 26,019(1) 216,883 16,058 7,621
1996 193,788 16,592 111,248 6,580 5,467
1995 149,255 10,777 106,624 8,387 5,896
<FN>
(1) 1997 income from operations excludes a $3,500,000 charge related to a plant closure
</TABLE>
<TABLE>
<CAPTION>
By Geographic Area
(Dollars in thousands)
Income Depreciation
Net From Total Capital and
Area Year Sales Operations Assets Expenditures Amortization
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
United States 1997 $274,351 $28,697(1) $ 178,658 $11,920 $6,554
1996 164,526 17,244 84,244 5,468 4,228
1995 129,997 11,829 80,857 6,538 4,509
Foreign 1997 31,710 1,716 24,415 4,101 1,036
1996 29,262 2,251 20,451 1,070 1,210
1995 19,258 1,506 17,847 1,804 1,343
Corporate 1997 -- (4,394) 13,810 37 31
1996 -- (2,903) 6,553 42 29
1995 -- (2,558) 7,920 45 44
Consolidated 1997 306,061 26,019(1) 216,883 16,058 7,621
1996 193,788 16,592 111,248 6,580 5,467
1995 149,255 10,777 106,624 8,387 5,896
<FN>
(1) 1997 income from operations excludes a $3,500,000 charge related to a plant closure
Export sales from the Company's United States operations were approximately
$19,085,000, $16,133,000 and $10,668,000 for the years ended September 30, 1997,
1996 and 1995, respectively.
</TABLE>
(12) CAPITAL STOCK AND STOCK OPTION PLAN
On January 23, 1997, the Board of Directors authorized a 10% stock dividend to
be distributed on February 28, 1997 to shareholders of record on February 7,
1997. On August 7, 1997, the Board of Directors authorized a 2-for-1 stock split
to be distributed on September 9, 1997 to shareholders of record on August 22,
1997. The consolidated financial statements have been retroactively restated to
reflect the number of shares outstanding following both the 10% dividend and
2-for-1 split.
The Company has a stock option plan for employees granting ten year options for
the purchase of up to 1,100,000 common shares of the Company. Options may be
exercised partially during the first three to five years from the date of grant,
and in whole or in part thereafter. The outstanding options expire at various
dates through the year 2006.
25
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESSEF CORPORATION AND SUBSIDIARIES
(CONTINUED)
(12) CAPITAL STOCK AND STOCK OPTION PLAN (CONTINUED)
Activity in the stock option plan is as follows:
<TABLE>
<CAPTION>
Number
of Options Price Per Share
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding October 1, 1995 525,351 $1.53--$ 7.50
Granted 178,352 $ 7.96
Expired (2,770) $ 7.50
Exercised (38,366) $1.53--$ 3.86
- --------------------------------------------------------------------------------------------------------
Outstanding September 30, 1996 662,567 $1.53--$ 7.96
Granted 20,000 $ 15.58
Expired (7,755) $1.53--$ 7.96
Exercised (20,546) $1.53--$ 7.96
- --------------------------------------------------------------------------------------------------------
Outstanding September 30, 1997 654,266 $1.53--$15.58
========================================================================================================
Exercisable September 30, 1997 406,131
========================================================================================================
</TABLE>
At September 30, 1997, the weighted average exercise price and weighted average
remaining contractual life for outstanding options described above were $7.35
per share and 7.2 years, respectively.
In addition to the options shown above, in 1990, the Company granted options to
the Chief Executive Officer to purchase 2,137,960 common shares at $.91 per
share. These options expire ten years from the date of grant and are fully
vested. None of these options have been exercised. Additionally, in 1994, 1995
and 1996, the Company granted certain other officers options to purchase
330,000, 55,000 and 165,000 common shares, respectively, which expire 10 years
from the date of grant. These options are considered variable options as they
vest based on attainment of specified results and periods of service.
Accordingly, the results of operations in 1997 include $1,653,000 ($1,074,000
after tax, or $.08 per share) in compensation expense related to these options.
The future impact on earnings related to employee stock options will be
dependent on changes in the Company's stock price, earnings per share and the
number of options outstanding.
The following table summarizes information about the Company's performance based
stock options outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Number Number Remaining Exercise
Price Granted Exercisable Life Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0.91 2,137,960 2,137,960 3.0 $ 0.91
7.42 385,000 -- 7.4 7.42
7.95 165,000 -- 9.0 7.95
- ----------------------------------------------------------------------------------------------
2,687,960 2,137,960 4.0 $ 2.27
==============================================================================================
</TABLE>
In 1997, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As permitted by
SFAS No. 123, the Company has not changed its method of accounting for
stock-based compensation. If the Company had adopted the fair value method of
accounting prescribed by SFAS No. 123, the effect on net income for 1997 and
1996, respectively, would not have been material.
(13) REAL ESTATE HELD FOR SALE
In November 1996, the Company received title to the real estate securing a note
receivable under an Agreement for Deed. The note receivable had been obtained in
connection with the sale of assets in 1991. The property is now included in real
estate held for sale at $3,850,000 which approximates its fair value based on
current appraisals.
26
<PAGE> 30
(14) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Net sales to one customer in the Swimming Pool and Spa Equipment Segment with
which the Company has a long-standing relationship amounted to $32,420,000 in
1997. At September 30, 1997, accounts receivable from this customer represents
less than 5% of total accounts receivable.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral to support customer
receivables. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
(15) DISCONTINUED OPERATIONS
The Company completed its divestiture of its subsidiary Hobson Brothers Aluminum
Foundry and Mold Works, Inc. in January 1997. The subsidiary has been designated
as a discontinued operation in the financial statements and prior year financial
statements have been restated to give effect to the sale as though it occurred
at the beginning of each period shown. No material gain or loss was recognized
on the sale transaction.
(16) LITIGATION
Twenty-eight lawsuits have been brought against the Company before the United
States District Court for the Southern District of New York, including a class
action on behalf of passengers, various individual passenger actions, and claims
by Celebrity Cruises, Inc. ("Celebrity"), concerning alleged exposure by
passengers to Legionnaire's bacteria aboard the cruise ship M/V Horizon, a ship
operated by Celebrity. The claims against the Company generally are based on
allegations that the Company designed, manufactured, and marketed sand filters
that were installed in a spa on the Horizon and allegations that the spa
contained bacteria that infected certain passengers on cruises from December,
1993 through July, 1994. Claims have also been asserted against Celebrity,
Fantasia Cruising, Inc. (the ship's owner), the German company that designed the
spa, and several companies that designed, manufactured and marketed other
component parts of the spa. Although the aggregate claims against the Company
and the other defendants exceed $200 million, management believes the Company
has meritorious defenses. While the outcome of this matter cannot be predicted
with certainty, based on information presently available, the Company does not
believe that this matter will have a material adverse effect on the Company's
financial position, results of operations or cash flows. The Company intends to
vigorously defend these matters.
Additionally, certain other claims, suits and complaints arising in the ordinary
course of business have also 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 cash flows.
The Company also believes that it has insurance coverage available, subject to
self-insured retentions, for a substantial portion of the cost of the
aforementioned claims, if any.
(17) ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("Board") recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
effective for financial statements issued for periods ending after December 15,
1997. The Company is required to adopt SFAS 128 in the first quarter of fiscal
1998. The Company does not expect SFAS 128 to have a material effect on the
computation of earnings per share.
In June 1997, the Board issued SFAS 130, "Reporting Comprehensive Income". SFAS
130 requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and to display the accumulated balance of
other comprehensive income separately from retained earnings and common stock in
the shareholders' equity section of the balance sheet. The Company is required
to adopt SFAS 130 in fiscal 1999. Such adoption is not expected to have a
material effect on the Company.
In June 1997, the Board issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS 131 requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments such as a measure of segment income or loss, certain specific
revenue and expense items, and segment assets. The Company is required to adopt
SFAS 131 in fiscal 1999. Such adoption is not expected to have a material effect
on the Company.
27
<PAGE> 31
REPORT OF MANAGEMENT
Management is responsible for the preparation and accuracy of the financial
statements and other information included in this report. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles using, where appropriate, management's best estimates and
judgment.
In meeting its responsibility for the reliability of the financial
statements, the Company depends upon its system of internal controls. The system
is supported by policies and guidelines, and by careful selection and training
of financial management personnel. Management believes that the Company's
internal control systems provide reasonable assurance that assets are
safeguarded against losses from unauthorized use or disposition, that
transactions are executed in accordance with management's authorization, and
accounting records are reliable as a basis for preparing financial statements.
The Board of Directors through its Audit Committee, which is composed
entirely of Directors who are neither officers nor employees of the Company, is
responsible for determining that management fulfills its responsibilities. The
Audit Committee meets periodically with management and with the independent
public accountants to review and assess the activities of each in meeting their
respective responsibilities.
The annual audit by the independent accountants provides an objective,
independent review of management's discharge of its responsibilities as they
relate to the fairness of reported operating results and financial condition.
The auditors obtain and maintain an understanding of the Company's accounting
and financial controls and conduct such tests and related procedures as they
deem necessary to arrive at an opinion on the fairness of the Company's
consolidated financial statements. The independent accountants have full access
to the Audit Committee to discuss, with and without management present, the
results of their audit work, the adequacy of internal accounting controls, and
the quality of financial reporting.
/s/ Thomas B. Waldin /s/Stuart D. Neidus
Thomas B. Waldin Stuart D. Neidus
President and Chief Executive Officer Executive Vice President
and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS, ESSEF CORPORATION
We have audited the accompanying consolidated balance sheets of Essef
Corporation and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended September 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits 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 consolidated financial statements present fairly, in
all material respects, the financial position of Essef Corporation and
subsidiaries as of September 30, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
November 19, 1997
