<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, 1997
-----------------------
+--+
| | 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
-------------------------------------------------------
ESSEF Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0777631
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Park Drive, Chardon, Ohio 44024
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (440) 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 9, 1998
- ------------------------------- --------------------------------
Common Shares, no par value 10,610,958 Shares
Page 1 of 16
<PAGE> 2
ESSEF CORPORATION
FORM 10-Q
For Quarter Ended December 31, 1997
INDEX
<TABLE>
<CAPTION>
Sequential
Page No.
----------
<S> <C> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1997 ............... 3
Condensed Consolidated Statements of Income -
Three Months Ended December 31, 1997 and 1996 .......... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended December 31, 1997 and 1996 .......... 5
Notes to Condensed Consolidated Financial
Statements ............................................. 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........ 9-10
Part II - Other Information
Item 1. Legal Proceedings .................................... 11
Item 2. Changes in Securities ................................ 11
Item 4. Submission of Matters to a Vote of Security
Holders .............................................. 11
Item 6. Exhibits and Reports on Form 8-K .....................11-16
</TABLE>
Page 2 of 16
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESSEF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
--------- ---------
ASSETS (unaudited) (audited)
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents ............................... $ 428 $ 1,668
Accounts receivable, net ................................ 42,144 39,512
Inventories, net ........................................ 38,035 34,597
Prepayments and other ................................... 2,780 2,173
--------- ---------
Total current assets ................................. 83,387 77,950
Property, plant and equipment, net .......................... 65,977 63,820
Real estate held for sale ................................... 4,333 4,333
Goodwill, net ............................................... 60,538 60,349
Deferred income taxes ....................................... 5,392 5,706
Other ....................................................... 5,110 4,725
--------- ---------
$ 224,737 $ 216,883
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Short-term borrowings ................................... $ 3,600 $ 5,320
Current maturities of long-term debt .................... 605 549
Accounts payable ........................................ 23,785 20,028
Accrued expenses ........................................ 20,625 29,237
Accrued income taxes .................................... 6,465 8,668
--------- ---------
Total current liabilities ............................ 55,080 63,802
Long-Term Debt .............................................. 99,480 81,658
Other Long-Term Liabilities ................................. 5,203 5,977
Shareholders' Equity
Preferred shares without par value,
authorized 1,000,000 shares,
none issued .......................................... - - - - - - - -
Common shares without par value,
authorized 40,000,000 shares, issued
11,105,516 and 11,090,431 shares,
respectively ......................................... 31,357 32,234
503,927 Treasury shares at cost ...................... (7,962) (7,962)
Retained earnings ....................................... 41,181 41,099
Foreign currency translation adjustment ................. 398 75
--------- ---------
Total shareholders' equity ....................... 64,974 65,446
--------- ---------
$ 224,737 $ 216,883
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 16
<PAGE> 4
ESSEF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales ........................... $ 79,618 $ 40,209
Cost of sales ....................... 61,487 30,094
---------- ----------
Gross profit ............... 18,131 10,115
Operating expenses .................. 16,397 8,475
---------- ----------
Income from operations ......... 1,734 1,640
Interest and other expense .......... 1,608 591
---------- ----------
Income before income taxes . 126 1,049
Provision for income taxes .......... 44 367
---------- ----------
Net income ................. $ 82 $ 682
========== ==========
Earnings Per Share:
Basic (a) .................. $ .01 $ .06
Diluted (a) ................ $ .01 $ .06
Average shares outstanding:
Basic ...................... 10,591 10,566
Diluted .................... 12,106 11,852
</TABLE>
(a) Basic and diluted earnings per share have been calculated in
accordance with SFAS No. 128 "Earnings Per Share", which was adopted
by the Company effective October 1, 1997. Accordingly all prior
periods have been restated.
See notes to condensed consolidated financial statements.
Page 4 of 16
<PAGE> 5
ESSEF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net income .................................... $ 82 $ 682
Adjustments to reconcile net income
to net cash used in operating activities
Depreciation and amortization ....... 2,842 1,199
Other ............................... 262 193
Change in operating assets and liabilities
Accounts receivable ...................... (2,568) (663)
Inventories .............................. (3,372) (3,810)
Prepayments and other assets ............. (562) (245)
Accounts payable ......................... 3,770 1,224
Accrued expenses ......................... (11,347) (4,117)
Accrued and deferred income taxes ........ (1,931) 360
-------- --------
Net cash used in operating activities (12,824) (5,177)
-------- --------
Cash Flows from Investing Activities
Additions to property, plant and
equipment ................................ (4,701) (2,121)
Business acquisitions ......................... (583) (1,210)
Other, net .................................... 634 129
-------- --------
Net cash used in investing activities (4,650) (3,202)
-------- --------
Cash Flows from Financing Activities
Proceeds from long term debt .................. 17,878 7,566
(Decrease) in short-term borrowings ........... (1,720) (733)
Proceeds from exercise of stock options ....... 76 --
-------- --------
Net cash provided by financing activities 16,234 6,833
-------- --------
Net decrease in cash and cash equivalents ........... (1,240) (1,546)
Cash and Cash Equivalents
Beginning of period ............................... 1,668 2,620
-------- --------
End of period ..................................... $ 428 $ 1,074
======== ========
Supplemental Cash Flow Information
Interest paid ............................ $ 1,393 $ 548
======== ========
Income taxes paid ........................ $ 1,928 $ --
======== ========
</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,
1997, and the results of their operations and their cash flows for
the three month periods ended December 31, 1997 and 1996.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1997 Annual Report to Shareholders,
sections of which are incorporated into the Company's Form 10-K filed
for the fiscal year ended September 30, 1997. The results of
operations for the three month period ended December 31, 1997 may not
necessarily be indicative of the operating results for the full year.
(2) RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts in
order to be consistent with the presentation for the current year.
(3) INVENTORIES
Inventories are valued as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, September 30,
1997 1997
-------- --------
FIFO COST
<S> <C> <C>
Raw materials ................. $ 16,197 $ 11,932
Work-in-process ............... 6,342 10,033
Finished goods ................ 16,893 13,857
-------- --------
39,432 35,822
Excess of FIFO over LIFO cost (1,397) (1,225)
-------- --------
Net Inventories .......... $ 38,035 $ 34,597
======== ========
</TABLE>
(4) SHORT-TERM BORROWINGS
The Company's European subsidiaries have working capital lines of
credit of approximately $15,000,000. At December 31, 1997 and
September 30, 1997, $1,592,000 and $3,312,000, respectively was
outstanding. At December 31, 1997 interest was at rates ranging from
4.35% to 9.0%. In addition, a note payable of $2,008,000 relating to
an acquisition was outstanding at December 31, 1997. The interest
rate on the note is 6%.
Page 6 of 16
<PAGE> 7
(5) LONG-TERM DEBT
The Company through its bank group has 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 LIBOR (or foreign currency equivalent) rate. A 20 basis points
facility fee is payable on the total amount of the commitment. The
Company is in compliance with all of its covenants under its credit
facilities. As of December 31, 1997, interest rates ranged from 6.16%
to 6.33%.
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 6.96% at December 31, 1997.
The Company does not use derivatives for trading purposes.
Long-term debt consists of the following:
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
--------- ---------
(unaudited) (audited)
<S> <C> <C>
Revolving credit facilities $ 97,450 $ 79,700
Other 2,635 2,507
--------- ---------
100,085 82,207
Less current maturities (605) (549)
--------- ---------
Long-term debt $ 99,480 $ 81,658
========= =========
</TABLE>
(6) ACCOUNTING FOR SFAS NO. 128 "EARNINGS PER SHARE"
The Financial Accounting Standards Board recently issued SFAS No.
128, "Earnings Per Share," which requires adoption for financial
statements issued for periods ending after December 15, 1997.
Accordingly, the Company adopted this new standard effective October
1, 1997. Prior period results have been restated to reflect the
adoption of the new standard.
(7) SUBSEQUENT EVENTS
On January 29, 1998, the Board of Directors authorized a 10% stock
dividend to be distributed on or about March 3, 1998 to
Page 7 of 16
<PAGE> 8
shareholders of record on February 12, 1998. The consolidated
financial statements have not been restated to reflect the number of
shares outstanding following the dividend.
(8) LITIGATION
There has been no material change to the status of the litigation
referred to in the Company's 1997 Annual Report to Shareholders,
sections of which are incorporated in the Company's Form 10-K filed
for the fiscal year ended September 30, 1997.
Page 8 of 16
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1996
Net sales in 1997 of $79,618,000 increased 98% from 1996 net sales of
$40,209,000 for the first quarter. The Swimming Pool Sales and Installation
Segment, and the Swimming Pool and Spa Equipment Segment, which benefited from
the acquisition of General Aquatics on May 1, 1997 together accounted for over
90% of the increase. The Water Treatment and Systems Equipment Segment posted a
10% increase in sales.
Gross Profit decreased from 25.2% to 22.8% of sales for the first quarter which
was primarily attributable to the impact of the General Aquatics acquisition on
the Swimming Pool and Spa Equipment Segment. The General Aquatics acquisition
increased the seasonality of the Company's overall sales, with the first quarter
being a seasonally slow quarter for this segment. Gross margins in this segment
were also impacted by costs associated with inefficiencies related to the
start-up of operations following the previously announced plant closing at City
of Industry, California.
Operating expenses, consisting of engineering and development, selling, and
administrative expenses, as a percentage of sales decreased from 21.1% to 20.6%
which was mainly attributable to an adjustment in the accrual for incentive
based employee stock options due to a reduction in the number of eligible stock
options.
Interest and other expense increased by $1,017,000 to $1,608,000. The increase
was the result of increased borrowings which were used to finance the
acquisition of General Aquatics in the third quarter of fiscal 1997.
The Company's effective tax rate was 35% in both periods.
As a result of the above items, net income of $82,000, or $.01 per diluted
share, decreased $600,000 from $682,000 or $.06 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 funded debt was $103,685,000 an increase of $16,158,000
from September 30, 1997. The increase came principally as a result of normal
seasonal working capital requirements which resulted in a working capital
increase from September 30, 1997 of $14,159,000 to $28,307,000 at December 31,
1997.
Page 9 of 16
<PAGE> 10
Also impacting the Company's debt were capital expenditures for the first
quarter which totaled $4,701,000 compared to $2,121,000 for the same period last
year. The increase in capital expenditures relates primarily to continued
investments made in India as part of the global expansion strategy and
investments made in the Company's Swimming Pool and Spa Equipment Segment plants
following the acquisition of General Aquatics which resulted in the closure of
the City of Industry plant and consolidation of its operations into the
facilities at Moorpark, California and Sanford, North Carolina.
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, included in the Annual Report to Shareholders for the year ended
September 30, 1997, one such lawsuit involves claims against the Company and
other defendents which exceed $200 million, for which management believes it has
meritorious defenses. 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 report and
other materials 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, the
impact of weather on pool businesses, and changes in federal or state laws.
Page 10 of 16
<PAGE> 11
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 1997 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 29, 1998. Of the 10,592,368 shares of
Common Stock outstanding and entitled to vote at the Annual Meeting,
10,094,900 shares were each present in person or by proxy, each
entitled to one vote on each matter to come before the meeting.
The following matter was submitted to a vote of security holders of the
Company at the Annual Meeting, with the results indicated below:
Proposal to approve amendment in the Company's Articles of
Incorporation to effect a change in the number of common shares
authorized to be issued and outstanding from 15,000,000 to 40,000,000:
<TABLE>
<S> <C>
Votes cast FOR the proposal: 9,210,886
Votes cast AGAINST the proposal: 874,230
Votes WITHHELD: 9,784
Shares held by brokers and nominees: 7,583,990
Shares held by brokers and nominess not voted: 349,810
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Earnings Per Share
13 Independent Public Accountants' Review Report
Page 11 of 16
<PAGE> 12
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 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)
Thomas B. Waldin
--------------------------------
THOMAS B. WALDIN
President and
Chief Executive Officer
(Principal Executive Officer)
Stuart D. Neidus
--------------------------------
STUART D. NEIDUS
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Date: February 9, 1998
Page 13 of 16
<PAGE> 1
EXHIBIT 11
EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
------- -------
<S> <C> <C>
Weighted average shares
outstanding 10,591 10,566
Add equivalent shares for
stock options (a) 1,515 1,286
------- -------
Average shares outstanding for
computation of earnings per
share 12,106 11,852
======= =======
Net Income $ 82 $ 682
======= =======
EARNINGS PER SHARE:
Basic $ .01 $ .06
======= =======
Diluted $. 01 $. 06
======= =======
<FN>
(a) Computed under the "Treasury Stock Method" using the average market price
for the respective period.
</TABLE>
Page 14 of 16
<PAGE> 1
EXHIBIT 13
INDEPENDENT PUBLIC ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders 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, 1997,
and the related condensed consolidated statements of income and cash flows
for the three-month periods ended December 31, 1997 and 1996. 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,
1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated November 19, 1997, 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, 1997 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
January 23, 1998
Page 15 of 16
<PAGE> 1
EXHIBIT 15
INDEPENDENT PUBLIC ACCOUNTANTS' AWARENESS LETTER
February 9, 1998
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, 1997 and 1996, as indicated in our report dated January
23, 1998; 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, 1997, 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 LLP
Cleveland, Ohio
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 428
<SECURITIES> 0
<RECEIVABLES> 42,144
<ALLOWANCES> 0
<INVENTORY> 38,035
<CURRENT-ASSETS> 83,387
<PP&E> 118,586
<DEPRECIATION> 52,609
<TOTAL-ASSETS> 224,737
<CURRENT-LIABILITIES> 55,080
<BONDS> 0
0
0
<COMMON> 23,395
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 224,737
<SALES> 79,618
<TOTAL-REVENUES> 79,618
<CGS> 61,487
<TOTAL-COSTS> 77,884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,608
<INCOME-PRETAX> 126
<INCOME-TAX> 44
<INCOME-CONTINUING> 82
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
