<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
- ---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT Of 1934
For the quarterly period ended December 31, 1996
---------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT Of 1934
For the transition period from to
----------------- -------------------------
Commission File Number 0-15902
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ESSEF Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0777631
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Park Drive, Chardon, Ohio 44024
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 286-2200
-----------------------------
None
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No N/A
--- --- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common shares, as of the latest practicable date.
Class Outstanding at February 13, 1997
- -------------------------------- ---------------------------------
Common Shares, no par value 4,803,262 Shares
Page 1 of 16
<PAGE> 2
ESSEF CORPORATION
Form 10-Q
For Quarter Ended December 31, 1996
INDEX
Sequential
Page No.
----------
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and September 30, 1996.......... 3
Condensed Consolidated Statements of Income -
Three Months Ended December 31, 1996 and 1995..... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended December 31, 1996 and 1995..... 5
Notes to Condensed Consolidated Financial
Statements........................................ 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 8-9
Part II - Other Information
Item 1. Legal Proceedings............................... 10
Item 2. Changes in Securities........................... 10
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 10-11
Item 6. Exhibits and Reports on Form 8-K................ 11-16
Page 2 of 16
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ESSEF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, September 30,
1996 1996
------------ -------------
ASSETS (unaudited)
- ------
Current Assets
<S> <C> <C>
Cash and cash equivalents .................... $ 1,074 $ 2,620
Accounts receivable, net ..................... 29,457 29,017
Inventories, net ............................. 23,372 19,445
Prepayments and other ........................ 2,129 1,645
--------- ---------
Total current assets ...................... 56,032 52,727
Property, plant and equipment, net ............... 39,149 38,297
Real estate held for sale ........................ 4,333 4,333
Goodwill, net .................................... 13,515 13,402
Other ............................................ 2,530 2,489
--------- ---------
$ 115,559 $ 111,248
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Notes payable ................................ $ 6,260 $ 6,999
Current maturities of long-term debt ......... 1,467 1,467
Accounts payable ............................. 12,745 12,247
Accrued expenses ............................. 8,387 12,481
Accrued income taxes ......................... 4,691 4,332
--------- ---------
Total current liabilities ................. 33,550 37,526
Long-Term Debt ................................... 25,085 17,512
Deferred Income Taxes ............................ 1,887 1,890
Other Long-Term Liabilities ...................... 1,111 982
Shareholders' Equity
Preferred shares without par value,
authorized 1,000,000 shares,
none issued ................................ -- --
Common shares without par value,
authorized 15,000,000 shares, issued
5,306,689 and 5,306,627 shares,
respectively ............................... 21,444 21,444
503,927 Treasury shares at cost ............ (7,962) (7,962)
Retained earnings ............................. 39,020 38,338
Foreign currency translation adjustment ....... 1,424 1,518
--------- ---------
Total shareholders' equity ............. 53,926 53,338
--------- ---------
$ 115,559 $ 111,248
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 16
<PAGE> 4
<TABLE>
<CAPTION>
ESSEF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands,
except share data)
(unaudited)
Three Months Ended
December 31,
------------------
1996 1995
------- ------
<S> <C> <C>
Net sales........................ $ 40,040 $ 37,638
Cost of sales.................... 29,134 27,114
-------- --------
Gross profit................ 10,906 10,524
Operating expenses............... 9,162 8,710
-------- --------
Income from operations...... 1,744 1,814
Interest and other expense....... 696 434
-------- --------
Income before income taxes....... 1,048 1,380
Provision for income taxes ...... 366 497
-------- --------
Income from continuing operations 682 883
Income from discontinued
operations.................. - 7
-------- --------
Net income.................. $ 682 $ 890
======== ===========
Average shares and common share
equivalents outstanding.......... 5,702,684 6,076,093
Primary Earnings Per Share
Continuing operations....... $ .12 $ .15
Net income.................. $ .12 $ .15
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 16
<PAGE> 5
<TABLE>
<CAPTION>
ESSEF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Three Months Ended
December 31,
-------------------
1996 1995
------- -------
Cash Flows from Operating Activities
<S> <C> <C>
Net income ............................................ $ 682 $ 890
Adjustments to reconcile net income
to net cash used in continuing operations
Discontinued operations ......................... -- 7
Depreciation and amortization ................... 1,199 1,342
Other ........................................... (66) 21
Change in operating assets and liabilities
Accounts receivable ................................ (663) (4,183)
Inventories ........................................ (3,810) (2,597)
Prepayments and other assets ....................... (245) 515
Accounts payable ................................... 1,224 4,313
Accrued expenses ................................... (4,117) (1,273)
Accrued and deferred income taxes .................. 360 496
Other long term liabilities ........................ 129 (1,214)
------- -------
Net cash used in continuing operations .......... (5,307) (1,683)
Net cash provided by discontinued
operations ...................................... 259 186
------- -------
Net cash used in operating activities ........... (5,048) (1,497)
------- -------
Cash Flows from Investing Activities
Additions to property, plant and
equipment .......................................... (2,121) (1,518)
Business acquisitions ................................. (1,210) (936)
------- -------
Net cash used in investing activities ........... (3,331) (2,454)
------- -------
Cash Flows from Financing Activities
Proceeds from long term debt .......................... 7,566 1,107
Increase (decrease) in notes payable .................. (733) 336
Treasury stock acquired ............................... -- (272)
Proceeds from exercise of stock options ............... -- 13
------- -------
Net cash provided by financing activities ....... 6,833 1,184
------- -------
Net decrease in cash and cash equivalents ................ (1,546) (2,767)
Cash and Cash Equivalents
Beginning of year ...................................... 2,620 3,870
------- -------
End of year ............................................ $ 1,074 $ 1,103
======= =======
Supplemental Cash Flow Information
Interest paid ....................................... $ 548 $ 390
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Page 5 of 16
<PAGE> 6
ESSEF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The accompanying unaudited Condensed Consolidated Financial Statements
contain all adjustments (consisting of only normal and recurring
adjustments) which, in the opinion of management, are necessary to present
fairly the consolidated financial position of Essef Corporation and
subsidiaries (the "Company") as of December 31, 1996, and the results of
their operations and their cash flows for the three month periods ended
December 31, 1996 and 1995.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1996 Annual Report to Shareholders,
sections of which are incorporated into the Company's Form 10-K filed for
the fiscal year ended September 30, 1996. The results of operations for the
three month period ended December 31, 1996 may not necessarily be
indicative of the operating results for the full year.
(2) Inventories
Inventories are valued as follows:
(Dollars in thousands) December 31, September 30,
1996 1996
----------- -------------
(unaudited)
FIFO COST
Raw materials...................... $12,812 $10,023
Work-in-process.................... 1,841 2,266
Finished goods..................... 10,176 8,529
------- -------
24,829 20,818
Excess of FIFO over LIFO cost.... (1,457) (1,373)
------- -------
Net Inventories............... $23,372 $19,445
======= =======
(3) Long-Term Debt
The Company's European subsidiaries have lines of credit of approximately
$15,000,000 available for working capital. At December 31, 1996, interest
was at rates ranging from 4.25% to 11.25%. In addition, a note payable of
$3,750,0 00 relating to an acquisition was outstanding at December 31,
1996. The interest rate on the note was lowered from 8% to 6% effective
January 1, 1997.
The Company through its bank group has an unsecured $33,000,000 revolving
loan, an acquisition-related line of credit in the maximum aggregate amount
of $10,000,000, and an additional term loan facility in the maximum
aggregate amount of $10,000,000. There are no outstanding borrowings on the
acquisition-related line of credit at December 31, 1996. The revolving loan
is due January 31, 1998 and may be extended in one year increments with the
approval of the bank group. The term loan is payable in equal quarterly
installments using a seven year amortization schedule with the unpaid
principal balance due January 31, 1998. Interest rates for the revolver,
Page 6 of 16
<PAGE> 7
acquisition-related line of credit and term loan a re based on increments
of the lead bank's base lending rate or LIBOR rate at the Company's option.
A 3/8 percent commitment fee is payable on the unused portion of the
revolving loan and the acquisition-related line of credit. The Company is
in compliance with all of its covenants under its credit facilities. As of
December 31, 1996, interest rates ranged from 6.5% to 8.25%.
Long-term debt consists of the following:
December 31, September 30,
1996 1996
------------ -------------
(Dollars in thousands) (unaudited)
Term loan $ 6,071 $ 6,428
Revolving loan 20,400 12,425
Other 81 126
--------- ---------
26,552 18,979
Less current maturities 1,467 1,467
--------- ---------
Long-term debt $ 25,085 $ 17,512
========= =========
(3) Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which requires adoption no later than fiscal
years beginning after December 15, 1995. The new standard defines a fair
value method of accounting for stock options and similar equity
instruments. SFAS 123 also permits Companies to continue to account for
such transactions under Accounting Principles Board No. 25 "Accounting for
Stock Issued to Employees," with certain other disclosures. The Company
does not intend to change its method of accounting for stock-based
compensation.
(4) Subsequent Events
The Company completed its divestiture of its subsidiary Hobson Brothers
Aluminium Foundry and Mould Works, Inc. on January 7, 1997. The subsidiary
has been designated as a discontinued operation in the financial
statements. No material g ain or loss will be recognized on the sale
transaction.
On January 23, 1997, the Board of Directors authorized a 10% stock
dividend to be distributed on or about February 28, 1997 to shareholders of
record on February 7, 1997. The consolidated financial statements have not
been restated to reflect the number of shares outstanding following the
dividend.
(5) Litigation
There has been no material change to the status of the litigation referred
to in the Company's 1996 Annual Report to Shareholders, sections of which
are incorporated in the Company's Form 10-K filed for the fiscal year ended
September 30, 1996.
Page 7 of 16
<PAGE> 8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1995
Net sales of $40,040,000 increased 6.4% from 1995 net sales of $37,638,000 for
the first quarter. The Company's continued emphasis on global expansion resulted
in foreign sales growth of 6.5% versus 6.3% domestic growth. As of December 31,
1996 and 1995 the Company had a backlog of orders believed by it to be firm of
approximately $19.9 and $19.6 million, respectively.
Cost of sales increased from 72.0% to 72.7% of net sales for the first quarter
which was attributable to slight increases in overhead expenses. Operating
expenses, consisting of engineering and development, selling, and administrative
expenses, as a percentage of sales decreased from 23.1% to 22.9% for the first
quarter.
Interest and other expense increased by $262,000, primarily as a result of
expenses incurred related to the real estate held for sale and a 12.5% increase
in average outstanding borrowings. These borrowings were used to finance the
Company's share buyback program initiated in fiscal 1996.
The Company's effective tax rate of 35% was lower than the 1996 rate of 36% due
to the impact of foreign taxes.
The above items resulted in income from continuing operations of $682,000 in
1996 compared to $883,000 in 1995, and a decrease in earnings per share from
$.15 in 1995 to $.12 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $22,482,000 at December 31, 1996 compared to
$15,201,000 at September 30, 1996, and the ratio of current assets to current
liabilities increased to 1.67 to 1.00 from 1.41 to 1.00. The increase in working
capital is due to a $.4 million increase in net accounts receivable, a $3.9
million increase in net inventories, and a $3.6 million decrease in accounts
payable and accrued expenses. The changes in accounts receivable and inventory
reflect normal seasonal working capital requirements.
Capital expenditures for the first quarter totaled $2,121,000 compared to
$1,518,000 for the same period last year, and were funded from net income,
depreciation and borrowings. The increase in capital expenditures relates
primarily to investments made in India as part of the global expansion strategy
and investments made domestically to increase capacity.
The Company is involved in various claims and lawsuits incidental to its
business, including product liability claims which are covered by insurance.
Although the Company believes that its reserves are adequate, a significant
Page 8 of 16
<PAGE> 9
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. Management is addressing the issue in
various ways and is reasonably confident, but cannot guarantee, that the
situation will be managed with no material adverse impact on the Company.
Page 9 of 16
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no material change to the status of the legal
proceedings referred to in the 1996 Form 10-K during the period
covered by this report.
ITEM 2. CHANGES IN SECURITIES
No change.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on January 23, 1997. Of the 4,802,700 shares of
Common Stock outstanding and entitled to vote at the Annual Meeting,
4,313,938 shares were present in person or by proxy, each entitled to
one vote on all matters to come before the meeting.
The following matters were submitted to a vote of security holders of
the Company at the Annual Meeting, with the results indicated below:
1.) To elect James M. Biggar, Gordon D. Harnett, Ralph T. King and
Elliot B. Ross directors of the corporation to hold office until the
Annual Meeting of Shareholders in January, 2000 and until their
respective successors are duly elected and qualified:
Votes cast FOR the election of Mr. Biggar: 4,310,216
Votes WITHHELD: 3,722
Votes cast FOR the election of Mr. Harnett: 4,310,366
Votes WITHHELD: 3,572
Votes cast FOR the election of Mr. King: 4,311,517
Votes WITHHELD: 2,421
Votes cast FOR the election of Mr. Ross: 3,859 663
Votes WITHHELD: 454,275
The incumbent directors of the corporation whose term of office
continued following the Annual Meeting were George M. Humphrey, Mary Ann
Jorgenson and Thomas B. Waldin. Their current terms of office will
expire with the Annual Meeting of Shareholders in January 1999.
Page 10 OF 16
<PAGE> 11
2.) Proposal to approve the Essef Corporation Performance Share
Plan:
Votes cast FOR the proposal: 4,130,300
Votes cast AGAINST the proposal: 182,368
Votes WITHHELD: 1,270
Shares held by brokers and nominees: 3,368,579
Shares held by brokers and nominees not voted: 350,267
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Per Share Earnings
13 Independent Public Accountants' Review
Report
15 Independent Public Accountants' Awareness
Letter
27 Financial Data Schedule
(b) Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this Report is filed.
Page 11 of 16
<PAGE> 12
Essef Corporation
Form 10Q
For the Quarter Ended December 31, 1996
Exhibit Volume - Table of Contents
Exhibits filed with and sequentially numbered as part of the report
Sequential
number of
Exhibit page of
Number Exhibit Description full report
- ------- ------------------- -----------
11 Computation of Per Share Earnings 14
13 Independent Public Accountants' Review Report 15
15 Independent Public Accountants' Awareness Letter 16
27 Financial Data Schedule
Page 12 of 16
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ESSEF Corporation
(Registrant)
/s/ Thomas B. Waldin
---------------------------------------
Thomas B. Waldin
President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Stuart D. Neidus
---------------------------------------
Stuart D. Neidus
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Date: February 13, 1997
Page 13 of 16
<PAGE> 1
COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11
The computation of primary earnings per share is as follows:
Three Months Ended
December 31,
------------------
1996 1995
---- ----
Weighted average shares
outstanding 4,802,762 5,183,259
Add equivalent shares for
stock options (a) 899,922 892,834
--------- ---------
Average shares outstanding for
computation of primary earnings
per share 5,702,684 6,076,093
========= =========
Income from continuing
operations $ 682,000 $ 883,000
========== ==========
Net Income $ 682,000 $ 890,000
========== ==========
PRIMARY EARNINGS PER COMMON SHARE:
From continuing operations $ .12 $ .15
====== ======
Net Income $ .12 $ .15
====== ======
(a) Computed under the "Treasury Stock Method" using the average market price
for the respective period.
Page 14 of 16
<PAGE> 1
EXHIBIT 13
INDEPENDENT PUBLIC ACCOUNTANTS' REVIEW REPORT
To the Board of Directors of
Essef Corporation
Chardon, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of Essef
Corporation and Subsidiaries (the "Company) as of December 31, 1996, and the
related condensed consolidated statements of operations for the three-month
periods ended December 31, 1996 and 1995 and the related condensed consolidated
statements of cash flows for the three-month periods ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of September 30,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in our
report dated November 19, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of September 30, 1996
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE
Cleveland, Ohio
January 23, 1997
Page 15 of 16
<PAGE> 1
EXHIBIT 15
INDEPENDENT PUBLIC ACCOUNTANTS' AWARENESS LETTER
February 12, 1997
Essef Corporation and Subsidiaries
220 Park Drive
Chardon, Ohio
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Essef Corporation and Subsidiaries for the periods ended December
31, 1996 and 1995, as indicated in our report dated January 23, 1997; because we
did not do an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is
incorporated by reference in Registration Statement No. 33-17758 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE
Cleveland, Ohio
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,074
<SECURITIES> 0
<RECEIVABLES> 29,457
<ALLOWANCES> 0
<INVENTORY> 23,372
<CURRENT-ASSETS> 56,032
<PP&E> 89,008
<DEPRECIATION> 49,859
<TOTAL-ASSETS> 115,559
<CURRENT-LIABILITIES> 33,550
<BONDS> 0
<COMMON> 13,482
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 115,559
<SALES> 40,040
<TOTAL-REVENUES> 40,040
<CGS> 29,134
<TOTAL-COSTS> 38,296
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 696
<INCOME-PRETAX> 1,048
<INCOME-TAX> 366
<INCOME-CONTINUING> 682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
