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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K Commission File No. 0-15902
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[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, 1998
[ ] 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 _____________
Essef Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0777631
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(State of Incorporation) (I.R.S. Employer
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
-------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Title of Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
Common Shares, The Company's common stock trades on The
No Par Value. Nasdaq Stock Market under the symbol ESSF.
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 4, 1998 was $121,480,791
------------
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 December 4, 1998
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Common Shares, no par value 11,966,827 Shares
-------------------
Portions of the following documents are incorporated by reference:
(1) 1998 Annual Report to Shareholders Part II
(2) Definitive Proxy Statement for the Annual Meeting
of Shareholders to be held February 4, 1999 Part III
The sequential page in this Report where the Exhibit Index appears is 22.
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ESSEF CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Begins
PART I On
Page
----
Item 1. Business..................................................... 3
Item 2. Properties................................................... 9
Item 3. Legal Proceedings............................................ 11
Item 4. Submission of Matters to a Vote of Security Holders ......... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholders' Matters........................................ 13
Item 6. Selected Financial Data...................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13
Item 8. Financial Statements and Supplementary Data.................. 13
Item 9. Disagreements on Accounting and Financial Disclosure......... 13
PART III
Item 10. Directors and Executive Officers of the Registrant........... 14
Item 11. Executive Compensation....................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 15
Item 13. Certain Relationships and Related Transactions............... 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 16
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PART I
ITEM 1. BUSINESS.
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(a) GENERAL DEVELOPMENT OF BUSINESS.
--------------------------------
Essef Corporation ("The Company") was incorporated in Ohio in 1954 as
Structural Fibers, Inc. and commenced operations by focusing on an emerging
technology: the use of fiberglass reinforced plastics (FRP) as an alternative to
metal in cast, forged, and other formed or fabricated parts. The Company, having
a strong engineering oriented emphasis, pioneered the production of such
products for use in Polaris and Hercules missiles, jet engines, electrical
components, and other national defense related items.
This experience helped the Company successfully develop a proprietary
molding technology that radically changed its direction. Perfection of the
internal bag-molding process enabled mass production of seamless pressure
vessels with fiberglass-reinforced plastic, and in 1959, the Company began to
specialize in the manufacture of these products.
During the last five years, the Company's development has focused on
growth by acquisitions in the U.S. and internal growth both in the U.S. and
internationally.
In 1994, the Company acquired Purex Pool Systems, Inc., a manufacturer
of pumps, filters and heaters for swimming pools and spas.
In 1995, the Company acquired Advanced Structures, Inc., a manufacturer
of pressure vessels and other components for the treatment of water; acquired
Euroimpex Srl in Milan, Italy, a manufacturer of pressure vessels and other
components for the treatment of water; and acquired Compool Corporation, a
manufacturer of electronic controls and valves for swimming pools and spas.
In 1996, the Company formed Structural India Private, Ltd. which during
1997 and 1998 built and started up a plant in Goa, India to manufacture pressure
vessels for sale in India, Asia, Europe and the U.S.
In 1997, the Company acquired certain assets and assumed certain
liabilities of General Aquatics, Inc. General Aquatics consisted of three
business units: American Products, Paragon and Anthony & Sylvan Pools. American
Products and Paragon design and manufacture swimming pool and spa equipment for
the residential, commercial, institutional and municipal markets and have been
integrated into the Company's Swimming Pool and Spa Equipment Segment. Anthony &
Sylvan is the largest in-ground residential swimming pool sales and installation
business in the United States and now comprises the Swimming Pool Sales and
Installation Segment. Also, in 1997 the Company acquired selected assets of
Stark Aquatics, a manufacturer of large composite filter systems for application
in commercial pools, waterparks and aquariums. The assets of Stark were merged
with Paragon to form Paragon Aquatics.
In 1998, the Company acquired the net operating assets and real estate
of Rainbow Lifegard, Inc., Rainbow Molding, Inc. and Kencar, Inc., collectively
known as Rainbow. Rainbow designs and manufactures accessory products for pools,
spas and aquariums and has been integrated into the Swimming Pool and Spa
Equipment Segment. Also in 1998 within the Swimming Pool and Spa Equipment
Segment, the Company acquired two swimming pool tile
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distribution businesses, Cozad & O'Hara, Inc. and Thompson Ceramic Tile. These
acquisitions expanded the Company's tile distribution capabilities to the
Western United States and Florida. Additionally in 1998, the Company acquired
the net operating assets of Tango Pools, an installer of swimming pools in Las
Vegas, Nevada and Pools by Andrews, Inc., an installer of pools in Florida,
which have been integrated into its Swimming Pool Sales and Installation
Segment.
In May 1998, the Company announced its intention to separate from the
Company its Swimming Pool Sales and Installation Segment ("Anthony & Sylvan")
and the associated assets and liabilities of such business. To accomplish the
separation, the Company plans to commence an initial public offering for 15 to
20 percent of Anthony & Sylvan's shares. The Company also plans to distribute
the remaining shares of Anthony & Sylvan to the Company's shareholders. Such
distribution is contingent, on, among other things, the distribution qualifying
as a tax-free distribution for federal income tax purposes under Section 355 of
the Internal Revenue Code of 1986.
The Company disposed of its Hobson Brothers Aluminum Foundry and
Moldworks, Inc. subsidiary in 1997 and its Enpac Corporation, subsidiary in
1998.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
----------------------------------------------
[For financial information about business segments in which the Company
operates, see Item 8 Financial Statements and Supplementary Data; Note
13: Business Segment Information under Notes to Consolidated Financial
Statements.]
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company operates in three business segments: Swimming Pool and Spa
Equipment; Water Treatment and Systems Equipment; and Swimming Pool Sales and
Installation. The Swimming Pool and Spa Equipment Segment supplies pumps,
filters, heaters, controls, valves, lights, accessories, and tile for swimming
pools and spas. The Water Treatment and Systems Equipment Segment manufactures
products for moving, storing and treating water in residential, commercial,
industrial and municipal water supply systems. Geographically, the manufacturing
operations of the two previously described segments are located in the United
States, Europe and India. The Swimming Pool Sales and Installation Segment
installs residential concrete in-ground swimming pools throughout the United
States. Following is a description of each of the three segments:
SWIMMING POOL AND SPA EQUIPMENT SEGMENT
PRINCIPAL PRODUCTS
The Company manufactures and sells a complete line of pumps, filters,
heaters, controls, valves and accessories for swimming pools and spas under the
Purex-Triton(TM), American(TM), Compool(TM) and Rainbow Lifegard(TM) names. It
is also a leading manufacturer of underwater lighting under the Amer-Lite(TM),
Aqua-Light(TM), Aqua-Lumin(TM), Fiberworks(TM) and Spa-Brite(TM) names.
Additionally it is a leading distributor of tile under its National Pool Tile
Group name.
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The filters come in a range of sizes and materials to satisfy consumer
needs. The filter media is either sand, diatomaceous earth, or cartridge. Pumps
are made in a range of sizes from 1/2 to 25 horsepower and are configured for
high flow or high pressure. The heaters are gas or propane and are available
with electronic or pilot light ignition. Accessories consist of chlorinators,
skimmers, brushes, and cartridge filters which come in a variety of
configurations and sizes. Lights are provided in a variety of wattages, bulb
type and cord length, as well as fiber-optics.
Paragon Aquatics designs swimming pool deck and underwater hardware and
fixtures and equipment for commercial, institutional and municipal swimming
pools including diving towers, starting platforms, lifeguard chairs, pool
railings, and underwater windows. Additionally, it manufactures large composite
filter systems for commercial pools, water parks and aquariums.
[For information relating to sales of the Swimming Pool and Spa
Equipment Segment, see Item 8 Financial Statements and Supplementary
Data Note 13: Business Segments Information under Notes to Consolidated
Financial Statements.]
CUSTOMERS AND DISTRIBUTION
In the swimming pool market, the Company sells its products primarily
to distributors and directly to installers. Sales of spa and jetted tub fittings
and pumps are made primarily to OEMs and the balance to distributors. The
Company maintains a field sales organization made up of salaried territory
managers and commissioned sales groups, each of whom is assigned to and based in
a geographic region to service customer accounts and develop business within
that particular region throughout the United States, Canada and Europe. One of
its customers, South Central Pools Supply, Inc. with which the Company has a
long standing relationship, constitutes more than 10% of the Company's total
revenues.
COMPETITION
There are a number of competitors in the Swimming Pool and Spa
Equipment market, one of which Hayward Industries, Inc., is considered by the
Company to be its major competitor. The Company is a market leader in sales of
in-ground and above-ground pool filters, pumps, heaters, underwater lights,
controls, valves, accessories and tile. The Company competes in these markets by
offering a wide variety of innovative and high quality products which are
competitively priced. Its existing distribution channels and reputation for
quality also contribute to its continuing market penetration.
WATER TREATMENT AND SYSTEMS EQUIPMENT SEGMENT
PRINCIPAL PRODUCTS
The Company manufactures and distributes fiberglass reinforced plastic
pressure vessels for the treatment, storage and delivery of water for
residential, commercial, industrial and municipal use. The Company produces two
companion lines of vessels, distinguishable by design and method of construction
but not by purpose or function, for sale to both the
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water treatment equipment and water systems equipment markets of this industry
segment. The vessels comprising what has become known as the FRP product line
(an acronym for fiberglass reinforced plastic) are integrally cast of a matrix
of thermosetting resin and randomly laid chopped fiberglass reinforcing
filaments. By contrast, the vessels comprising the newer polyglass
(PolyGlass(TM)) product line are either blow-molded or rotationally cast of
thermoplastic resins and then reinforced by a patterned winding of continuous
fiberglass filaments. The Company also manufactures composite pressure vessel
housings for membrane filtration in industrial and municipal applications using
the aforementioned fiberglass filament winding process.
[For information relating to sales of the Water Treatment and Systems
Equipment Segment, see Item 8 Financial Statements and Supplementary
Data; Note 13: Business Segment Information under Notes to Consolidated
Financial Statements.]
CUSTOMERS AND DISTRIBUTION
The Company sells water treatment products to major original equipment
manufacturers (OEMs) in the United States, Canada, Europe, Asia and other
international markets through salaried sales personnel and commissioned sales
representatives. It sells water systems products through both salaried sales
personnel and commissioned sales representatives to plumbing wholesalers and
well system supply houses primarily in the United States and Canada.
COMPETITION
The Company's major United States competitor in the manufacture of
pressure vessels is Park International, Inc. The Company has several competitors
in Europe. The Company competes both domestically and in Europe on the basis of
its extensive product line, quality, price and service.
It's estimated that manufacturers of steel tanks currently hold in
excess of 85% of the hydropneumatic and expansion pressure vessels market. The
largest producer of steel tanks and the Company's primary competitor in these
products is Amtrol, Inc. The Company competes in this market by providing its
customers with better features, responsive distribution practices, and
competitive pricing.
The Company is one of several manufacturers of composite pressure
vessel housings. The Company competes on the basis of quality and an extensive
product line.
SWIMMING POOL SALES AND INSTALLATION SEGMENT
PRINCIPAL PRODUCTS
The Company designs, sells and installs a broad range of in-ground
concrete swimming pools under the Anthony & Sylvan name. The Company focuses on
high-quality, innovative swimming pools tailored to each customer's
specifications. The Company has 40 sales offices serving 24 major metropolitan
areas in 15 states. Sixteen of these showrooms have adjacent retail outlets
which offer a complete line of complementary products, from necessities such as
heaters, filters, lights and chemicals,
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to the extras such as floatation devices and water sports accessories. The
Company also has a growing pool renovation and modernization business.
[For information relating to sales of the Swimming Pool Sales and
Installation Segment, see Item 8 Financial Statements and Supplementary
Data Note 13: Business Segments Information under Notes to Consolidated
Financial Statements.]
CUSTOMERS AND DISTRIBUTION
The Company is the largest concrete in-ground residential swimming pool
sales and installation business in the United States. The Company is
headquartered in Doylestown, PA and has 40 sales offices, which serve 24 major
metropolitan markets in 15 states. The Company employs a dedicated sales force
of approximately 200 trained sales consultants who interpret and design a pool
owner's individual specifications. The pool renovation and modernization
business has been fostered by relationships built over the years.
COMPETITION
The Company primarily competes with regional and local installers. The
Company believes that there is a small number of companies that compete with it
on a national basis. It competes on the basis of its size, national presence,
leading market share, industry expertise, reputation and name recognition.
SOURCES AND AVAILABILITY OF RAW MATERIALS - ALL INDUSTRY SEGMENTS
- -----------------------------------------------------------------
The principal materials used in the Swimming Pool and Spa Equipment and
Water Treatment and Systems Equipment Segments of the Company's business are
fiberglass, plastic resins, steel and motors. The principal material used in the
Swimming Pool Sales and Installation Segment is concrete. The Company has
alternate sources for all of its principal materials and is not dependent on any
single supplier. The Company has alternate sources for substantially all other
materials required in its production processes.
BACKLOG
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As of September 30, 1998 and September 30, 1997, the Swimming Pool and
Spa Equipment and Water Treatment and Systems Equipment Segments had a backlog
of orders believed by it to be firm of approximately $8,717,000 and $12,525,000,
respectively. The Company expects the backlog as of September 30, 1998 to be
delivered in fiscal 1999. Additionally, as of September 30, 1998 and September
30, 1997, the Company had approximately $18,000,000 and $16,000,000 of contracts
for swimming pool installations which had not been started. The Company believes
based on past experience that the September 30, 1998 backlog will be completed
in 1999.
SEASONALITY AND WORKING CAPITAL
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The Swimming Pool and Spa Equipment Segment experiences the greatest
demand for its products during the second and third quarters of each fiscal
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year, when it will fill approximately 60% of its orders. During this period, its
customers increase their inventories in order to meet the peak demand for
swimming pool equipment which occurs in the spring and early summer months. The
Company's peak demand for working capital also occurs during the second and
third quarters. In addition to the strong demand it experiences, the Swimming
Pool and Spa Equipment Segment offers its customers extended terms during the
first two quarters, thereby decreasing cash flow from operations. The Company
expects its working capital requirements to continue to fluctuate on a seasonal
basis and to be financed both from its revolving credit facility and from
operations.
Anthony & Sylvan Pools, which comprises the Swimming Pool Sales and
Installation Segment experiences the greatest demand for pool installations
during the third and fourth quarters of the fiscal year. During this period it
recognizes approximately 70% of its annual revenues as this is the time of the
year that most of its customers desire to have a swimming pool installed.
ENGINEERING AND DEVELOPMENT
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The Company believes its success is partially dependent upon its
ability to adapt materials, machines, processes and other emerging technologies
to design and manufacture new products, and to improve the performance, quality
and manufactured cost of existing products. For this reason, expenditures of the
Company in engineering and development have been primarily directed to the
development of devices and processes and not to fundamental research.
[For expenditures on engineering and development see Item 8 Financial
Statements and Supplementary Data; Consolidated Statements of Income -
Essef and Subsidiaries For The Years Ended September 30, 1998, 1997 and
1996; line item Engineering and development.]
PATENTS AND TRADEMARKS
- ----------------------
The Company owns various trademarks, trade names and logos, the most
important of which are Anthony & Sylvan(TM), Where America Swims(TM),
Amer-Lite(TM), Challenger(TM), Codeline(TM), Compool(TM), Comptec(TM),
Fiberworks(TM), Lifegard(TM), MiniMax(TM), NautilusR, PolyGlass(TM), Purex(TM),
Purex-Triton(TM), Rainbow(TM), Titan(TM), TritonR, Ultra-Flow(TM), WellMate(TM),
and WhisperFlo(TM). The Company owns a number of patents covering various
aspects of its products and manufacturing processes. Although the Company
believes its patents, trademarks, trade names and logos enhance its competitive
position and the name recognition of its products, the Company relies more on
its reputation for quality and its relationship with customers for the
maintenance and growth of its business.
ENVIRONMENTAL MATTERS
- ---------------------
The Company's manufacturing processes, like those of the plastics
industry generally, result in the generation of hazardous and other plant waste
and emissions. Consequently, the Company is subject to various federal, state
and local laws and regulations relating to environmental protection. The Company
routinely monitors and maintains installed equipment as necessary to remain in
substantial compliance with applicable
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environmental regulations to which they are subject. All operating facilities
file reports with and obtain current operating permits from appropriate
governmental oversight agencies.
EMPLOYEES
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At September 30, 1998, the Company employed approximately 2,700
persons, of whom approximately 800 are salaried managerial, administrative and
supervisory personnel. The balance are hourly personnel.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
[For financial information about foreign and domestic operations and
export sales see item 8 Financial Statements and Supplementary Data;
NOTE 13: BUSINESS SEGMENT INFORMATION under NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.]
ITEM 2. PROPERTIES.
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The Company's headquarters are in Chardon, Ohio, in offices contiguous to the
divisions operating there.
The Company conducts its manufacturing, distribution, accounting, purchasing,
marketing and engineering operations at eighteen facilities in the United
States, three in India, one in Belgium, two in Italy and one in the U.K. Anthony
& Sylvan also has 40 sales offices (one owned and 39 leased) in the U.S. Given
the relative small size and large number of these satellite offices, detail of
these facilities has not been shown below. In addition the Company has a
facility located in the U.S. which it has classified as real estate held for
sale in its financial statements. The table below summarizes certain information
with respect to the principal facilities.
<TABLE>
<CAPTION>
Approximate
Acreage and Principal
Location Square Footage Status Products
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<S> <C> <C> <C>
Chardon, OH 284,000 sq.ft. Owned Manufacture of water
treatment and systems
equipment; Corporate
Headquarters.
Sanford, NC 243,200 sq.ft. Owned Manufacture and ware-
housing of swimming
pool and spa equipment
Moorpark, CA 225,000 sq.ft. Leased Manufacture and ware-
housing of swimming
pool and spa equipment
LaGrangeville, NY 31,000 sq.ft. Leased Manufacture of swimming
pool deck and hardware
fixtures and fittings.
</TABLE>
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<TABLE>
<CAPTION>
Approximate
Acreage and Principal
Location Square Footage Status Products
- -------- -------------- ------ --------
<S> <C> <C> <C>
Herentals, Belgium 116,400 sq.ft. Owned Manufacture of water
treatment and systems
equipment, and swimming
pool and spa equipment
Escondido, CA 64,000 sq.ft. Leased Manufacture of composite
pressure vessel housings
Milan, Italy 19,375 sq.ft. Leased Manufacture of pressure
vessels and other
products for water
treatment
Milan, Italy 25,900 sq.ft. Leased Manufacture of pressure
vessels and other
products for water
treatment
Mountain View, CA 16,600 sq.ft. Leased Manufacture of
electronic controls and
valves for swimming
pools and spas
Daytona Beach, FL 124,000 sq.ft. Owned Real estate held for
sale.
Goa, India 80,000 sq.ft. Owned Manufacture of pressure vessels and
other products for water treatment
Doylestown, PA 44,000 sq.ft. Owned Showroom, equipment and
storage for sales and
installation of swimming
pools.
El Monte, CA 40,800 sq.ft. Owned Manufacture and ware-
house of swimming pool
and spa accessories.
El Monte, CA 37,100 sq.ft. Owned Manufacture and ware-
house of swimming pool
and spa accessories.
El Monte, CA 37,500 sq.ft. Owned Manufacture and ware-
house of swimming pool
and spa accessories.
Anaheim, CA 18,000 sq.ft. Leased Distribution of pool
tile.
</TABLE>
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The Company considers all of its properties, both owned and leased, together
with the related machinery and equipment contained therein to be well
maintained, in good operating condition, and suitable and adequate for its
present and foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS.
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The Company is a participating defendant under a 1985 consent decree issued in
UNITED STATES OF AMERICA V. CHEM-DYNE CORPORATION. This consent decree attempts
to resolve conflicting claims of responsibility and provide for the cleanup of a
toxic waste disposal site in Hamilton, Ohio. The Company contributed
approximately $29,000 of the $23,000,000 trust established by the consent decree
and paid approximately $12,000 in administrative costs associated with the suit.
Although the Company remains contingently liable for any and all additional
amounts that may be necessary for the cleanup of the disposal site, the Company
does not believe that any significant additional expense will be incurred.
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.
The Company and other defendants recently entered into an agreement to settle
the class action portion of the aforementioned litigation. In November 1998, the
court issued an order which preliminarily approved the settlement, representing
in excess of $100 million of claims, subject to a final hearing in February,
1999. The Company's portion of this settlement, which is not material, is
covered by insurance.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -----------------------------------------------------
SHAREHOLDERS' MATTERS.
----------------------
Essef Corporation Common Shares are listed in the NASDAQ Stock Market under the
symbol ESSF. At December 4, 1998, 11,966,827 outstanding common shares were held
by 306 shareholders of record. There were no cash dividends declared or paid for
the year ended September 30, 1998 as the company continued its policy of
retaining earnings and cash for future expansion of the business. For
information on the market price range see page 11 of Essef's 1998 Annual Report
to Shareholders incorporated herein by reference to Exhibit 13 of this filing
[1998 Annual Report to Shareholders].
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
Information with respect to selected financial data for each of the last five
fiscal years contained on page 10 of Essef's 1998 Annual Report to Shareholders
is incorporated herein by reference to Exhibit 13 of this filing [1998 Annual
Report to Shareholders].
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS.
--------------
The Management's discussion and analysis of financial condition and results of
operations contained on pages 12 through 15 of Essef's 1998 Annual Report to
Shareholders is incorporated herein by reference to Exhibit 13 of this filing
[1998 Annual Report to Shareholders].
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements and accompanying notes of Essef and its
subsidiaries contained on pages 16 through 30, inclusive of Essef's 1998 Annual
Report to Shareholders, together with the report of Independent Public
Accountants relating thereto contained on page 31 thereof, and the unaudited
quarterly financial data under the heading "Quarterly Financial Information" on
page 11 of such Annual Report, are incorporated herein by reference to Exhibit
13 of this filing [1998 Annual Report to Shareholders].
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
(a) Identification of Directors
[For identity of directors including age, business experience,
positions held and other relevant information see Essef Corporation -
Proxy Statement - December 23, 1998; (definitive proxy statement filed
with the Commission pursuant to Regulation 14A) under the headings
DIRECTORS, on pages 2-4 and DIRECTORS' COMMITTEES, MEETINGS AND FEES on
pages 4-5 is incorporated herein by this reference].
(b) Identification of Executive Officers
The persons named below are the executive officers of the Company at
the date hereof.
Name Age Position
---- --- --------
Thomas B. Waldin 56 President and Chief Executive
Officer, Director
Douglas J. Brittelle 51 Executive Vice President
Gerald C. Hornick 66 Executive Vice President
Stuart D. Neidus 47 Executive Vice President
and Chief Financial Officer
Mark E. Brody 37 Vice President - Finance
Kevan K. Langner 54 Assistant Secretary and General
Counsel
Thomas B. Waldin has been Chief Executive Officer and President of the
Company since his appointment in 1990, and a Director since January 31, 1991.
Since 1977, Mr. Waldin has been active as an investor in and director of a
number of small businesses. He retired in 1987 as Chief Operating Officer of USG
Interiors, Inc., and Chief Executive Officer of Donn, Inc. The former is a unit
of USG Corporation, a worldwide manufacturer and distributor of building
products, created in connection with the acquisition of Donn, Inc. in 1986.
Douglas J. Brittelle has been an Executive Vice President of the
Company since April 1, 1997 and has served as President of Pac-Fab, Inc. since
January 3, 1995. Prior to that, from 1971 to 1994 he served in various positions
with General Electric, most recently, he served as General Manager of G.E.'s
Apparatus Service Business headquartered in Schenectady, New York. Prior to
that, he was General Manager of G.E.'s Transformer Business headquartered in
Hickory, North Carolina from 1983 to 1992.
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Gerald C. Hornick has been an Executive Vice President of the
Company since January 29, 1998 and has served as Chief Operating Officer of
Structural North America since 1985, and as its President since January, 1991.
Prior to his appointment as Executive Vice President, he served as Assistant
Treasurer of the Company from 1988 to 1998.
Stuart D. Neidus has been Executive Vice President and Chief
Financial Officer of the Company since September 3, 1996 and Chairman and Chief
Executive Officer of Anthony & Sylvan Pools since September 17, 1998. Prior to
that, from 1992 to 1996 he served in various positions with Premier Farnell plc
(the successor to Premier Industrial Corporation), most recently as Executive
Vice President. Prior to that Mr. Neidus was with KPMG Peat Marwick LLP from
1973 to 1992 where he was a partner from 1984.
Mark E. Brody has been Vice President - Finance since August 11,
1997. Prior to that, from 1987 to 1997 he served in various positions with
Sudbury, Inc., most recently as Vice President and Chief Financial Officer.
Kevan K. Langner has been Assistant Secretary and General
Counsel since May 1, 1997. Prior to that, from 1995 to 1997, he was General
Counsel of General Aquatics, Inc. and General Counsel of KDI DH Corp. Prior to
that, Mr. Langner was with KDI Corporation from 1979 to 1995 where he was
Secretary and General Counsel.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
[For information relating to compensation of executive officers and directors
see Essef Corporation - Proxy Statement - December 23, 1998; under the headings
DIRECTORS' COMMITTEES, MEETINGS AND FEES on pages 4-5, and EXECUTIVE
COMPENSATION on page 6 incorporated herein by this reference].
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
[For information relating to security ownership of certain beneficial owners and
management see Essef Corporation - Proxy Statement - December 23, 1998; under
the heading BENEFICIAL OWNERSHIP OF SHARES appearing on pages 12-14 incorporated
herein by this reference].
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
[For information regarding related transactions see Essef Corporation - Proxy
Statement - December 23, 1998 under the heading BENEFICIAL OWNERSHIP OF SHARES
on pages 12-14 incorporated herein by this reference].
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- ------------------------------------------------------------------
(a) Documents filed as part of this report:
(1) The following consolidated financial statements of Essef
Corporation and Subsidiaries, together with the independent auditors'
report relating thereto, contained on pages 16 through 30, inclusive of
Essef's 1998 Annual Report to its shareholders, and the unaudited
quarterly financial data set forth under the heading "Quarterly
Financial Information" on page 11 of such Annual Report, are
incorporated herein by reference to Exhibit 13 of this filing [1998
Annual Report to Shareholders].
Consolidated Balance Sheets at September 30, 1998 and 1997
Consolidated Statements of Income for the years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended September
30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Quarterly Financial Information (unaudited)
(2) All financial statement schedules are omitted because they are not
required, not applicable, or the information is given in the
consolidated financial statements or the notes thereto.
16
<PAGE> 17
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K
Current Form 10-K Document/Data
Exhibit Number Required
- -------------- -------
3.1 Third Amended Articles of Incorporation effective January
29, 1998.
3.2 Code of Regulations as Amended January 30, 1992.
10.1 1987 Employees' Stock Option Plan. (Reference is made to
Exhibit 10.1 to the report on Form 10-K for the year
ended September 30, 1994, which exhibit is herein
incorporated by reference)
10.2 Deferred Compensation Plan as amended September 29, 1989.
(Reference is made to Exhibit 10.2 to the report on form
10-K for the year ended September 30, 1989, which exhibit
is herein incorporated by reference)
10.3 Essef Corporation Employees' Retirement Plan and Trust
Agreement (October 1, 1995 Restatement). Reference is
made to Exhibit 10.13 to the report on form 10-K for the
year ended September 30, 1996, which exhibit is herein
incorporated by reference)
10.4 Employment Agreement - Thomas B. Waldin, Chief Executive
Officer. (Reference is made to Exhibit 10.7 to the report
on form 10-K for the year ended September 30, 1990, which
exhibit is herein incorporated by reference)
10.5 First Amendment to Employment Agreement - Thomas B.
Waldin, Chief Executive Officer. (Reference is made to
Exhibit 10.9 to the report on form 10-K for the year
ended September 30, 1994, which exhibit is herein
incorporated by reference)
17
<PAGE> 18
Current Form 10-K Document/Data
Exhibit Number Required
- -------------- --------
10.6 Employment Agreement - Douglas J. Brittelle, President
Pac-Fab, Inc. (Reference is made to Exhibit 10.12 to the
report on Form 10-K for the year ended September 30,
1995, which exhibit is herein incorporated by reference)
10.7 Employment Agreement - Stuart D. Neidus, Executive Vice
President and Chief Financial Officer (Reference is made
to Exhibit 10.8 to the report on Form 10-K for the year
ended September 30, 1996, which exhibit is herein
incorporated by reference).
10.8 Asset Purchase Agreement between Purex Pool Systems, Inc.
and Hydrotech Chemical Corporation dated as of March 1,
1994. (Reference is made to Exhibit 2 to the report on
form 10-Q for the quarter ended March 31, 1994, which
exhibit is herein incorporated by reference)
10.9 Amendment Number One, dated March 19, 1994, to Asset
Purchase Agreement between Purex Pool Systems, Inc. and
Hydrotech Chemical Corporation dated as of March 1, 1994.
(Reference is made to form 8-K dated March 19, 1994 which
exhibit is herein incorporated by reference)
10.10 Credit Agreement between Essef Corporation and National
City Bank and ABN Amro Bank N.V. dated April 28, 1997.
(Reference is made to Exhibit 10 to the report on form
10-Q for the quarter ended March 31, 1997, which exhibit
is herein incorporated by reference)
10.11 Credit Agreement first amendment between Essef
Corporation and National City Bank and ABN Amro Bank, N.
V. dated July 1, 1997. (Reference is made to Exhibit
10.12 to the report on Form 10-K for the year ended
September 30, 1997, which exhibit is herein incorporated
by reference).
10.12 Credit Agreement second amendment between Essef
Corporation and National City Bank and ABN-Amro Bank
N.V., dated May 1, 1998. (Reference is made to Exhibit
10.12 to the report on Form 10-Q for the quarter ended
June 30, 1998, which exhibit is herein incorporated by
reference).
10.13 Asset Purchase Agreement among GAI Acquisition Corp.,
General Aquatics Corporation, General Aquatics, Inc.,
Anthony and Sylvan Pools, Inc., KDI American Products,
Inc. and KDI Paragon, Inc. dated as of March 24, 1997.
(Reference is made to Form 8-K dated May 15, 1997 which
exhibit is herein incorporated by reference).
18
<PAGE> 19
Current Form 10-K Document/Data
Exhibit Number Required
- -------------- --------
10.14 First Amendment to Form 8-K filing dated May 15, 1997.
Amendment required to include financial statements and
proforma financial information required pursuant to Item
7 of this report which were omitted from the original
report. (Reference is made to Form 8-K dated July 15,
1997 which exhibit is herein incorporated by reference).
10.15 Employment Agreement - Stuart D. Neidus, Chairman and
Chief Executive Officer of Anthony & Sylvan Pools
Corporation dated as of September 17, 1998.
13 1998 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
(b) The following report filed on Form 8-K during the last quarter of
fiscal year ended 1998 is herein incorporated by reference.
Filed 8/5/98
------------
Asset Purchase Agreement dated June 1, 1998 by and among Rainbow
Acquisition Corporation, the sellers and the Price Family Trust, UAD
11-6-97.
19
<PAGE> 20
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 STUART D. NEIDUS
----------------
Stuart D. Neidus
Executive Vice President and
Chief Financial Officer
December 23, 1998
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.
Signature Title
- --------- -----
THOMAS B. WALDIN President and Chief Executive Officer
- ---------------- (Director and Principal Executive
Thomas B. Waldin Officer)
STUART D. NEIDUS Executive Vice President and
- ---------------- Chief Financial Officer
Stuart D. Neidus (Principal Accounting Officer)
20
<PAGE> 21
Signature Title
- --------- -----
JAMES M. BIGGAR Director
- ---------------
James M. Biggar
GORDON D. HARNETT Director
- -----------------
Gordon D. Harnett
GEORGE M. HUMPHREY, II Director
- ----------------------
George M. Humphrey, II
MARY ANN JORGENSON Director
- ------------------
Mary Ann Jorgenson
RALPH T. KING Director
- -------------
Ralph T. King
Date: December 23, 1998
21
<PAGE> 22
Essef Corporation
1998 Form 10-K Annual Report
Exhibit Volume - Table of Contents
Exhibits filed with and sequentially numbered as part of the report
Number Exhibit Description
- ------ -------------------
3.1 Third Amended Article of Incorporation effective January 29,
1992
3.2 Code of Regulations as Amended January 30, 1992
10.15 Employment Agreement - Stuart D. Neidus, Chairman and Chief
Executive Officer of Anthony & Sylvan Pools Corporation
13 1998 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
22
<PAGE> 1
Exhibit 3.1
THIRD AMENDED ARTICLES OF INCORPORATION OF
ESSEF CORPORATION
FIRST: The name of the Corporation shall be ESSEF CORPORATION.
SECOND: The place in the State of Ohio where its principal office is
located is the Village of Chardon, Geauga County.
THIRD: The purposes of the corporation are as follows: To engage in any
lawful act or activity for which corporations may be formed under Section
1791.01 to 1701.98, inclusive, of the Revised Code of Ohio, as now in effect or
hereafter amended.
FOURTH: The number of shares which the corporation is authorized to
issue and have outstanding is 41,000,000 consisting of 40,000,000 Common Shares
without par value (hereinafter called "Common Shares") and 1,000,000 Serial
Preferred Shares without par value (hereinafter called "Serial Preferred
Shares").
No holder of any class of shares authorized to be issued by the
Corporation now or in the future shall, upon the offering for sale by the
Corporation for cash, or for any other consideration, of any unissued shares, or
any obligation convertible into or exchangeable for shares of the Corporation
have any right to purchase or subscribe for any of such unissued shares or
obligations by reason of or in proportion to his holdings of shares of the
Corporation at the time of such offering.
Serial Preferred Shares and Common Shares shall have the following
express terms:
DIVISION A
EXPRESS TERMS OF THE SERIAL PREFERRED SHARES
Section 1. The Serial Preferred Shares may be issued from time to time
in one or more series. All Serial Preferred Shares shall be of equal rank and
shall be identical, except in respect of the matters that may be fixed by the
Board of Directors as hereinafter provided, and each share of each series shall
be identical with all other shares of such series, except as to the date from
which dividends are cumulative. Subject to the provisions of Sections 2 to 7,
both inclusive, of this Division, which provisions shall apply to all Serial
Preferred Shares, the Board of Directors hereby is authorized to cause such
shares to be issued in one or more series and with respect to each such series
prior to the issuance thereof to fix:
(a) The designation of the series, which may be by distinguishing
number, letter or title;
(b) The number of shares of the series, which number the Board of
Directors may (except where otherwise provided in the creation of
the series) increase or decrease (but not below the number of
shares thereof then outstanding);
2
<PAGE> 2
(c) The annual dividend rate of the series;
(d) The dates at which dividends, if declared, shall be payable, and
the dates from which dividends shall be cumulative;
(e) The redemption rights and price or prices, if any, for shares of
the series;
(f) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series;
(g) The amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation;
(h) Whether the shares of the series shall be convertible into Common
Shares, and, if so, the conversion price or prices, any
adjustments thereof, and all other terms and conditions upon
which such conversion may be made; and
(i) Restrictions (in addition to those set forth in Sections 5(b) and
5(c) of this Division) on the issuance of shares of the same
series or of any other class or series.
The Board of Directors is authorized to adopt from time to time
amendments to the Articles of Incorporation fixing, with respect to each series,
the matters described in clauses (a) to (i), both inclusive, of this Section 1.
Section 2. The holders of Serial Preferred Shares of each series, in
preference to the holders of Common Shares and of any other class of shares
ranking junior to the Serial Preferred Shares, shall be entitled to receive out
of any funds legally available and when and as declared by the Board of
Directors dividends in cash at the rate for such series fixed in accordance with
the provisions of Section 1 of this Division and no more, payable quarterly on
the dates fixed for such series. Such dividends shall be cumulative, in the case
of shares of each particular series, from and after the date or dates fixed with
respect to such series. No dividends may be paid upon or declared or set apart
for any of the Serial Preferred Shares for any quarterly dividend period unless
at the same time a like proportionate dividend for the same quarterly dividend
period, ratably in proportion to the respective annual dividend rates fixed
therefor, shall be paid upon or declared or set apart for all Serial Preferred
Shares of all series then issued and outstanding and entitled to receive such
dividend.
Section 3. In no event so long as any Serial Preferred Shares shall be
outstanding shall any dividends, except a dividend payable in Common Shares or
other ranking junior to the Serial Preferred Shares, be paid or declared or any
distribution be made except as aforesaid on the Common Shares or any other
shares ranking junior to the Serial Preferred Shares, nor shall any Common
Shares or any other shares ranking junior to the Serial Preferred Shares be
purchased, retired, or otherwise acquired by the Corporation (except out of the
proceeds of
3
<PAGE> 3
the sale of Common Shares or other shares ranking junior to the Serial Preferred
Shares received by the Corporation subsequent to January 1, 1969);
(a) Unless all accrued and unpaid dividends on Serial Preferred
Shares, including the full dividends for the current quarterly
dividend period, shall have been declared and paid or a sum
sufficient for payment thereof set apart; and
(b) Unless there shall be no arrearages with respect to the
redemption of Serial Preferred Shares of any series from any
sinking fund provided for shares of such series in accordance
with the provisions of Section 1 of this Division.
Section 4. (a) The holders of Serial Preferred Shares of any series
shall, in case of voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation, be entitled to receive in full out of the
assets of the Corporation, including its capital, before any amount shall be
paid or distributed among the holders of the Common Shares or any other shares
ranking junior to the Serial Preferred Shares, the amounts fixed with respect to
the shares of such series in accordance with Section 1 of this Division; plus an
amount equal to all dividends accrued and unpaid thereon to the date of payment
of the amount due pursuant to such liquidation, dissolution or winding up of the
affairs of the Corporation. In case the net assets of the Corporation legally
available therefor are insufficient to permit the payment upon all outstanding
Serial Preferred Shares of the full preferential amount to which they are
respectively entitled, then such net assets shall be distributed ratably upon
outstanding Serial Preferred Shares in proportion to the full preferential
amount to which each such share is entitled.
After payment to holders of Serial Preferred Shares of the full
preferential amounts as aforesaid, holders of Serial Preferred Shares as such
shall have no right or claim to any of the remaining assets of the Corporation.
(b) The merger or consolidation of the Corporation into or with any
other corporation or the merger of any other corporation into it, or the sale,
lease or conveyance of all or substantially all the property or business of the
Corporation, shall not be deemed to be a dissolution, liquidation or winding up,
voluntary or involuntary, for the purposes of this Section 4.
Section 5. (a) The holders of Serial Preferred Shares shall be entitled
to one vote for each share of such stock upon all matters presented to the
shareholders; and except as otherwise provided herein or required by law, the
holders of Serial Preferred Shares and the holders of Common Shares shall vote
together as one class on all matters.
If, and so often as, the Corporation shall be in default in the payment
of six (6) full quarterly dividends (whether or not consecutive) on any series
of Serial Preferred Shares at the time outstanding, whether or not earned or
declared, the holders of Serial Preferred Shares of all series, voting
separately as a class and in addition to all other rights to vote for Directors
shall be entitled to elect, as herein provided, two (2) members of the Board of
Directors of the
4
<PAGE> 4
Corporation; provided, however, that the holders of Serial Preferred Shares
shall not have or exercise such special class voting rights except at meetings
of the shareholders for the election of Directors at which the holders of not
less than fifty percent (50%) of the outstanding Serial Preferred Shares of all
series then outstanding are present in person or by proxy; and provided further
that the special class voting rights provided for herein when the same shall
have become vested shall remain so vested until all accrued and unpaid dividends
on the Serial Preferred Shares of all series then outstanding shall have been
paid, whereupon the holders of Serial Preferred shall be divested of their
special class voting rights in respect of subsequent elections of Directors,
subject to the revesting of such special class voting rights in the event
hereinabove specified in this paragraph.
In the event of default entitling the holders of Serial Preferred Shares
to elect two (2) Directors as above specified, a special meeting of the
shareholders for the purpose of electing such Directors shall be called by the
Secretary of the Corporation upon written request of, or may be called by, the
holders of record of at least fifteen percent (15%) of the Serial Preferred
Shares of all series at the time outstanding, and notice thereof shall be given
in the same manner as that required for the annual meeting of shareholders;
provided, however, that the Corporation shall not be required to call such
special meeting if the annual meeting of shareholders shall be held within one
hundred twenty (120) days after the date of receipt of the foregoing written
request from the holders of Serial Preferred Shares. At any meeting at which the
holders of Serial Preferred Shares shall be entitled to elect Directors, the
holders of fifty percent (50%) of the then outstanding Serial Preferred Shares
of all series, present in person or by proxy, shall be sufficient to constitute
a quorum, and the vote of the holders of a majority of such shares so present at
any such meeting at which there shall be such a quorum shall be sufficient to
elect the members of the Board of Directors which the holders of Serial
Preferred Shares are entitled to elect as hereinabove provided.
The two directors who may be elected by the holders of Serial Preferred
Shares pursuant to the foregoing provisions shall be in addition to any other
directors then in office or proposed to be elected otherwise than pursuant to
such provisions, and nothing in such provisions shall prevent any or require the
resignation of any director elected otherwise than pursuant to such provisions.
Notwithstanding any classification of the other directors of the Corporation,
the two directors elected by the holders of Serial Preferred Shares shall be
elected annually for terms expiring at the next succeeding annual meeting of
shareholders.
(b) The affirmative vote of the holders of at least two-thirds of the
Serial Preferred Shares at the time outstanding, given in person or by proxy at
a meeting called for the purpose at which the holders of Serial Preferred Shares
shall vote separately as a class, shall be necessary to effect any one or more
of the following (but so far as the holders of Serial Preferred Shares are
concerned, such action may be effected with such vote):
(i) Any amendment, alteration or repeal of any of the provisions of
the Articles of Incorporation or of the Regulations of the
Corporation which affects adversely the voting powers, rights or
preferences of the holders of Serial Preferred Shares; provided,
however, that, for the purpose of this clause (i) only, neither
the amendment of the Articles of Incorporation so as to authorize
or create, or to increase the authorized
5
<PAGE> 5
or outstanding amount of, Serial Preferred Shares or of any
shares of any class ranking on a parity with or junior to the
Serial Preferred Shares, nor the amendment of the provisions of
the Regulations so as to increase the number of Directors of the
Corporation shall be deemed to affect adversely the voting
powers, rights or preferences of the holders of Serial Preferred
Shares; and provided further, that if such amendment, alteration
or repeal affects adversely the rights or preferences of one or
more but not all series of Serial Preferred Shares at the time
outstanding, only the affirmative vote of the holders of at least
two-thirds of the number of the shares at the time outstanding of
the series so affected shall be required;
(ii) The authorization or creation of, or the increase in the
authorized amount of, any shares of any class, or any security
convertible into shares of any class, ranking prior to the Serial
Preferred Shares; or
(iii) The purchase or redemption (for sinking fund purposes or
otherwise) of less than all of the Serial Preferred Shares then
outstanding except in accordance with a stock purchase offer to
all holders of record of Serial Preferred Shares, unless all
dividends upon all Serial Preferred Shares then outstanding for
all previous quarterly dividend periods shall have been declared
and paid or funds therefor set apart and all accrued sinking fund
obligations applicable thereto shall have been complied with.
(c) The affirmative vote of the holders of at least a majority of the
Serial Preferred Shares at the time outstanding, given in person or by proxy at
a meeting called for the purpose at which the holders of Serial Preferred Shares
shall vote separately as a class, shall be necessary to effect any one or more
of the following (but so far as the holders of Serial Preferred Shares are
concerned, such action may be effected with such vote):
(i) The consolidation of the Corporation with or its merger into any
other corporation unless the corporation resulting from such
consolidation or merger will have after such consolidation or
merger no class of shares either authorized or outstanding
ranking prior to the Serial Preferred Shares except the same
number of shares ranking prior to the Serial Preferred Shares and
having the same rights and preferences as the shares of the
Corporation authorized and outstanding immediately preceding such
consolidation or merger, and each holder of Serial Preferred
Shares immediately preceding such consolidation or merger shall
receive the same number of shares, with the same rights and
preference, of the resulting corporation or the redemption price
of such shares; or
(ii) the authorization of any shares ranking on a parity with the
Serial Preferred Shares or an increase in the authorized number
of Serial Preferred Shares.
Section 6. The holders of Serial Preferred Shares shall have no
preemptive right to
6
<PAGE> 6
purchase or have offered to them for purchase any shares or other securities of
the corporation, whether now or hereafter authorized.
Section 7. For the purpose of this Division A:
Wherever reference is made to shares "ranking prior to the Serial
Preferred Shares" or "on a parity with the Serial Preferred Shares", such
reference shall mean and include all shares of the Corporation in respect of
which the rights of the holders thereof as to the payment of dividends or as to
distributions in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation are given preference
over, or rank on an equality with (as the case may be) the rights of the holders
of Serial Preferred Shares; and whenever reference is made to shares "ranking
junior to the Serial Preferred Shares", such reference shall mean and include
all shares of the Corporation in respect of which the rights of the holders
thereof as to the payment of dividends and as to distributions in the event of a
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation are junior and subordinate to the rights of the holders of
Serial Preferred Shares.
DIVISION B
EXPRESS TERMS OF THE COMMON SHARES
The Common Shares shall be subject to he express terms of the Serial
Preferred Shares and any series thereof. Each Common Shares shall be equal to
every other Common Share and the holders thereof shall be entitled to one vote
for each shares of such stock on all questions presented to the shareholders.
FIFTH: No Person shall make a Control Share Acquisition without first
obtaining the prior authorization of the Corporation's shareholders at a special
meeting of shareholders called by the Board of Directors in accordance with this
Article Fifth.
Section 1. PROCEDURE. Any Person who proposes to make a Control Share
Acquisition shall deliver a notice ("Notice") to the Corporation at its
principal place of business that sets forth all of the following information:
(a) The identity of the Person who is giving the Notice;
(b) A statement that the Notice is given pursuant to this Article
Fifth;
(c) The number and class of shares of the Corporation owned, directly
or indirectly, by the Person who gives the Notice;
(d) The range of voting power (as specified in Section 6(b)(1) under
which the proposed Control Share Acquisition would, if
consummated, fall;
(e) A description in reasonable detail of the terms of the proposed
Control Share Acquisition; and
7
<PAGE> 7
(f) Representations, supported by reasonable information, that the
proposed Control Share Acquisition would be consummated if
shareholder approval is obtained and, if consummated, would not
be contrary to law and that the Person who is giving the Notice
has the financial capacity to make the proposed Control Share
Acquisition.
Section 2. CALL OF SPECIAL MEETING OF SHAREHOLDERS. The Board of
Directors of the Corporation shall, within ten (10) days after receipt by the
Corporation of a Notice that complies with Section 1, call a special meeting of
shareholders to be held not later than fifty (50) days after receipt of the
Notice by the Corporation, unless the Person who delivered the Notice agrees to
a later date, to consider the proposed Control Share Acquisition; provided that
the Board of Directors shall have no obligation to call such a meeting if they
make a determination within ten (10) days after receipt of the Notice that the
proposed Control Share Acquisition could not be consummated for financial or
legal reasons.
The Board of Directors may adjourn such special meeting of shareholders
if prior to such meeting the Corporation has received a Notice from any other
Person and the Board of Directors has determined that the Control Share
Acquisition proposed by such other Person, or a merger, consolidation or sale of
assets of the Corporation, shall be presented to shareholders at an adjourned
meeting or at a special meeting held at a later date.
For purposes of making a determination that a special meeting of
shareholders should not be called pursuant to this Section 2, no such
determination shall be deemed void or voidable with respect to the Corporation
merely because one or more of its directors or officers who participated in
deliberations regarding such determination may be deemed to be other than
disinterested, if in any such case the material facts of the relationship giving
rise to a basis for self-interest are known to the directors and the directors,
in good faith reasonably justified by the facts, make such determination by the
affirmative vote of a majority of the disinterested directors, even thought the
disinterested directors constitute less than a quorum. For purposes of this
paragraph, "disinterested directors" shall mean directors whose material
contacts with the Corporation are limited principally to activities as a
director or shareholder. Person who have substantial recurring business or
professional contacts with the Corporation shall not be deemed to be
"disinterested directors" for purposes of this provision. A director shall not
be deemed to be other than a "disinterested director" merely because he would no
longer be a director if the proposed Control Share Acquisition were approved and
consummated.
Section 3. NOTICE OF SPECIAL MEETING. The Corporation shall, as promptly
as practicable, give notice of the special meeting of shareholders called
pursuant to Section 2 to all shareholders of record as of the record date set
for such meeting. Such notice shall include or be accompanied by a copy of the
Notice and by a statement of the Corporation, authorized by the Board of
Directors, of its position or recommendation, or that it is taking no position
or making no recommendation, with respect to the proposed Control Share
Acquisition.
Section 4. REQUIREMENTS FOR APPROVAL. The Person who delivered the
Notice may make the purposed Control Share Acquisition if both of the following
occur:
8
<PAGE> 8
(a) The shareholders of the Corporation authorize such acquisition at
the special meeting of shareholders called pursuant to Section 2,
at which meeting a quorum is present, by the affirmative vote of
a majority of the Voting Stock represented at such meeting in
person or by proxy and by a majority of the portion of such
Voting Stock represented at such meeting in person or by proxy
excluding the votes of Interested Shares. A quorum shall be
deemed to be present at such special meeting if at least a
majority of the issued and outstanding Voting Stock, and a
majority of the issued and outstanding Voting Stock, and a
majority of such Voting Stock excluding Interested Shares, are
represented at such meeting in person or by proxy.
(b) Such acquisition is consummated in accordance with the terms so
authorized, no later than three hundred sixty (360) days
following shareholder authorization of the Control Share
Acquisition.
Section 5. VIOLATIONS OF RESTRICTION. Any Voting Stock issued or
transferred to any Person in violation of this Article Fifth shall hereinafter
be called "Excess Shares." In the event that any Person acquires Excess Shares,
then, in addition to any other remedies which the Corporation may have at law or
in equity as a result of such acquisition, the Corporation shall have the right
to redeem, or to deny voting rights or other shareholder rights appurtenant to
such Excess Shares. The Corporation additionally shall have the right to regard
the Person who holds Excess Shares as having acted as an agent on behalf of the
Corporation in acquiring the Excess Shares and to hold such Excess Shares on
behalf of the Corporation. As the equivalent of treasury securities for such
purposes, the Excess Shares shall not be entitled to any voting rights, shall
not be considered to be outstanding for quorum or voting purposes, and the
Person who holds Excess Shares shall not be entitled to receive dividends,
interest or any other distribution with respect to the Excess Shares. Any Person
who receives dividends, interest or any other distribution with respect to
Excess Shares shall hold the same as agent for the Corporation, and following a
permitted transfer, for the transferee thereof. Notwithstanding the foregoing,
any Person who holds Excess Shares may transfer the same (together with any
distributions thereon) to any Person who, following such transfer, would not own
shares in violation of this Article Fifth. Upon such permitted transfer, the
Corporation shall pay or distribute to the transferee any distributions on the
Excess Share not previously paid or distributed.
Section 6. DEFINITIONS. As used in this Article Fifth:
(a) "Person" includes, without limitation, an individual, a
corporation (whether nonprofit or for profit), a partnership, an
unincorporated society or association, and two or more person
having a joint or common interest.
(b) (1) "Control Share Acquisition" means the acquisition, directly
or indirectly, by any Person, of shares of the Corporation that,
when added to all other shares of the Corporation in respect of
which such Person, directly or indirectly, may exercise or direct
the exercise of voting
9
<PAGE> 9
power as provided in this Section 6(b)(1), would entitle such
Persons, immediately after such acquisition, directly or
indirectly, to exercise or direct the exercise of voting power of
the Corporation in the election of directors within any of the
following ranges of such voting power:
(A) One-fifth or more but less than one-third of such voting power;
(B) One-third or more but less than a majority of such voting power;
or
(C) A majority or more of such voting power.
A bank, broker, nominee, trustee, or other Persons who acquires shares
in the ordinary course of business for the benefit of others in good
faith and not for the purpose of circumventing this Article Fifth
shall, however, be deemed to have voting power only of shares in
respect of which such Person would be able to exercise or direct the
exercise of votes at a special meeting of shareholders called pursuant
to Section 2 of this Article Fifth without further instruction from
others. For purposes of this Article Fifth, the acquisition of
securities immediately convertible into shares of the Corporation with
voting power in the election of directors shall be treated as an
acquisition of such shares.
(2) The acquisition of any shares of the Corporation does not
constitute a Control Share Acquisition for the purposes of this
Article Fifth if the acquisition is consummated in any of the
following circumstances:
(A) By underwriters in good faith and not for the purpose of
circumventing this Article Fifth in connection with an offering
to the public of securities of the Corporation;
(B) By bequest or inheritance, by operation of law upon the death of
any individual, or by any other transfer without valuable
consideration, including a gift, that is made in good faith and
not for the purpose of circumventing this Article Fifth;
(C) Pursuant to the satisfaction of a pledge or other security
interest created in good faith and not for the purpose of
circumventing this Article Fifth;
(D) Pursuant to a merger, consolidation, combination or majority
share acquisition adopted or authorized by shareholder vote in
compliance with the provisions of Section 1701.78 or 1701.83 of
the Ohio Revised Code if the Corporation is the surviving or new
corporation in the merger or consolidation or is the acquiring
corporation in the combination or majority share acquisition;
(E) Under such circumstances that the acquisition does not result in
the Person acquiring shares of the Corporation being entitled,
immediately thereafter and for the first time, directly or
indirectly, to exercise or direct the exercise
10
<PAGE> 10
of voting power of the Corporation in the election of directors
within the range of one-fifth or more but less than one-third of
such voting power, or within any of the ranges of voting power
specified in Section 6(b)(1)(A), (B) or (C) which is higher than
the range of voting power applicable to such Person immediately
prior to such acquisition;
(F) Prior to May 8, 1987;
(G) Pursuant to a contract existing prior to May 8, 1987; or
(H) Pursuant to the exercise of stock options granted pursuant to a
stock option plan approved by shareholders.
The acquisition by any person of shares of the Corporation in a manner
described under this Section 6(b)(2) shall be deemed to be a Control
Share Acquisition authorized pursuant to this Article Fifth within the
range of voting power specified in Section 6(b)(1)(A), (B) or (C) that
such Person is entitled to exercise after such acquisition, provided
that, in the case of an acquisition in a manner described under
Section 6(b)(2)(B) or (C), the transferor of shares to such Person had
previously obtained any authorization of shareholders required under
this Article Fifth in connection with such transferor's acquisition of
shares of the Corporation.
(3) The acquisition of shares of the Corporation in good faith and
not for the purpose of circumventing this Article Fifth from any
Person whose Control Share Acquisition had previously been
authorized by shareholders in compliance with this Article Fifth,
or from any Person whose previous acquisition of shares would
have constituted a Control Share Acquisition but for Section
6(b)(2), does not constitute a Control Share Acquisition for the
purpose of this Article Fifth unless such acquisition entitles
any Person, directly or indirectly, alone or with others, to
exercise or direct the exercise of voting power of the
Corporation in the election of directors in excess of the range
of such voting power authorized pursuant to this Article Fifth,
or deemed to be so authorized under Section 6(b)(2).
(c) "Interested Shares" means Voting Stock with respect to which any
of the following persons may exercise or direct the exercise of
the voting power:
(1) any Person whose Notice prompted the calling of a special meeting
of shareholders pursuant to Section 2;
(2) any officer of the Corporation elected or appointed by the
directors of the Corporation; and
(3) any employee of the Corporation who is also a director of the
Corporation.
11
<PAGE> 11
(d) "Voting Stock" mans all securities of the Corporation entitled to
vote generally in the election of directors, and, for purposes of
Section 5 of this Article Fifth, shall mean securities of the
Corporation immediately convertible into securities entitled to
vote generally in the election of directors.
Section 7. PROXIES. No proxy appointed for or in connection with the
shareholder authorization of a Control Share Acquisition pursuant to this
Article Fifth is valid if it provides that it is irrevocable. No such proxy is
valid unless it is sought, appointed, and received both:
(a) In accordance with all applicable requirements of law; and
(b) Separate and apart form the sale or purchase, contract or tender
for sale or purchase, or request or invitation for tender for
sale or purchase, of shares of the Corporation.
Section 8. REVOCABILITY OF PROXIES. Proxies appointed for or in
connection with the shareholder authorization of a Control Share Acquisition
pursuant to this Article Fifth shall be revocable at all times prior to the
obtaining of such shareholder authorization, whether or not coupled with an
interest.
Section 9. AMENDMENTS. Notwithstanding any other provisions of these
Articles of Incorporation or the Regulations of the Corporation or any
provisions of law that might otherwise permit a lesser vote, but in addition to
any affirmative vote of the holders of any particular class or series of stock
required by law, the Articles of Incorporation or the Regulations of the
Corporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the Voting Stock, voting as a single class,
shall be required to alter, amend or repeal this Article Fifth or adopt any
provisions in the Articles of Incorporation or Regulations of the Corporation
which are inconsistent with the provisions of this Article Fifth.
Section 10. LEGEND ON SHARE CERTIFICATES. Each certificate representing
shares of the Corporation's capital stock shall contain the following legend:
"Transfer of the shares represented by this Certificate is subject to
the provisions of Article Fifth of the Corporation's Articles of Incorporation
as the same may be in effect from time to time. Upon written request delivered
to the Secretary of the Corporation at its principal place of business, the
Corporation will mail to the holder of this Certificate a copy of such
provisions without charge within five (5) days after receipt of written request
therefor. By accepting this Certificate the holder hereof acknowledges that it
is accepting same subject to the provisions of said Article Fifth as the same
may be in effect from time to time and covenants with the Corporation and each
shareholder thereof from time to time to comply with the provisions of said
Article Fifth as the same may be in effect from time to time.
12
<PAGE> 12
SIXTH: The provisions of Section 1701.831 of the Ohio Revised Code, as
amended from time to time, or any successor provision or provisions to said
Section, shall not apply with respect to any particular Control Share
Acquisition, as such is defined in said Section, regarding this Corporation so
long as Article Fifth of these Articles of Incorporation, as such Articles of
Incorporation may be amended from time to time, remains an Article of these
Articles of Incorporation and remains substantially in full force and effect,
disregarding any renumbering of such Article Fifth resulting from any amendment
of these Articles of Incorporation.
SEVENTH: No shareholder of the Corporation shall have the right to vote
cumulatively in the election of directors of the Corporation.
EIGHTH: To the extend permitted by law, the corporation may purchase or
otherwise acquire, at any time and from time to time, shares of any class issued
by it upon such terms and conditions and for such consideration as the Board of
Directors may determine.
NINTH: Section 1. These Second Amended Articles of Incorporation may be
amended by the affirmative vote of the holders of a majority of the shares of
the Corporation entitled to vote thereon, at an annual or special meeting duly
called for such purpose.
Section 2. Notwithstanding the provisions of Section 1 of Article Ninth
hereof, any amendment of Article Fifth hereof shall require the affirmative
vote, at an annual or special meeting duly called for such purpose of the
holders of shares representing at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of the Corporation.
TENTH: These Third Amended Articles of Incorporation supersede and take
the place of the existing Amended Articles of Incorporation of the Corporation
and all amendments thereto.
Amended January 29, 1998
13
<PAGE> 1
Exhibit 3.2
CODE OF REGULATIONS
ARTICLE I
---------
MEETING OF SHAREHOLDERS
-----------------------
Section 1. Annual Meetings. The annual meeting of shareholders shall be
held at such time and on such date in the month of January of each year as may
be fixed by the board of directors and stated in the notice of the meeting, for
the election of directors, the consideration of reports to be laid before such
meeting and the transaction of such other business as may properly come before
the meeting.
Section 2. Special Meetings. Special meetings of the shareholders shall
be called upon the written request of the chairman of the board, the president
or, in case of the president's absence, death or disability, the vice-president
authorized to exercise the authority of the president, the directors by action
at a meeting, or a majority of the directors acting without a meeting, or of
shareholders holding at least fifty percent (50%) of all shares outstanding and
entitled to vote thereat. Calls for such meeting shall specify the time, place
and purposes thereof.
Section 3. Notices of Meetings. Unless waived, written notice of each
annual or special meeting stating the time, place and the purposes thereof shall
be given by personal delivery or by mail to each shareholder of record entitled
to vote at or entitled to notice of the meeting, not more than ninety (90) days
nor less than seven (7) days before any such meeting. If mailed, such notice
shall be directed to the shareholder at his address as the same appears upon the
records of the corporation. Any shareholder, either before or after any meeting,
may waive any notice required to be given by law or under these Regulations, and
by attendance at any meeting shall be deemed to have waived notice thereof.
Section 4. Place of Meetings. Meetings of shareholders shall be held at
the principal office of the corporation in Chardon, Ohio, unless the board of
directors decides that a meeting shall be held at some other place within or
without the State of Ohio and causes the notice thereof to so state.
Section 5. Quorum. The holders of record of shares entitling them to
exercise a majority of the voting power of the corporation entitled to vote at
any meeting, present in person or by proxy, shall constitute a quorum for the
transaction of business to be considered at such meeting; provided, however,
that no action required by law or by the Articles of Incorporation or the
Regulations to be authorized or taken by the holders of a designated proportion
of the shares of any particular class or of each class, may be authorized or
taken by a lesser proportion.
<PAGE> 2
The holders of a majority of the voting shares represented at a meeting, whether
or not a quorum is present, may adjourn such meeting from time to time, until a
quorum shall be present.
Section 6. Record Date. The board of directors may fix a record date for
any lawful purpose, including without limitation, the determination of
shareholders entitled to (i) receive notice of or to vote at any meeting, (ii)
receive payment of any dividend or distribution, (iii) receive or exercise
rights of purchase of or subscription for, or exchange or conversion of, shares
or other securities, subject to contract right with respect thereto, or (iv)
participate in the execution of written consents, waivers or releases. Said
record date shall not be a date earlier than the date on which it is fixed, and
shall not be more than ninety (90) days preceding the date of such meeting, the
date fixed for the payment of any dividend or distribution, or the date fixed
for the receipt or the exercise of rights, as the case may be.
Section 7. Proxies. A person who is entitled to attend a shareholders'
meeting, to vote thereat, or to execute consents, waivers or releases, may be
represented at such meeting or vote thereat, and execute consents, waivers and
releases, and exercise any of his other rights, by proxy or proxies appointed by
a writing signed by such person.
Section 8. Ratification of Acts of Directors and Officers. Except as
otherwise provided by law or by the Articles of Incorporation, any transaction
or contract or act of the corporation or of the directors or of the officers may
be ratified by the affirmative vote at a meeting of shareholders, or by the
written consent with or without a meeting, of the holders of shares entitling
them to exercise a majority of the voting power of the corporation, and such
ratification shall be as valid and as binding as though affirmatively voted for
or consented to by every shareholder of the corporation.
Section 9. Business to be Conducted at Meetings. At any meeting of
shareholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before a meeting of
shareholders, business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the directors, otherwise
properly brought before the meeting by or at the direction of the directors or
otherwise properly brought before the meeting by a shareholder. For business to
be properly brought before a meeting of shareholders by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than sixty (60) days nor more than ninety (90) days prior to the meeting;
provided, however, that in the event that less than seventy-five (75) days'
notice or prior public disclosure of the date of the meeting is given or made to
the shareholders, notice by the shareholder to be timely
<PAGE> 3
must be so received not later than the close of business on the fifteenth (15th)
day following the earlier of the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. A shareholder's notice to
the secretary shall set forth as to each matter the shareholder proposes to
bring before the meeting (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and record address of the shareholder proposing such
business; (iii) the class and number of shares of the corporation which are
beneficially owned by such shareholder; and (iv) any material interest of such
shareholder in such business.
Notwithstanding anything in the Regulations of the corporation to the
contrary, no business shall be conducted at a meeting of shareholders except in
accordance with the procedures set forth in this Section 9.
The Chairman of the meeting of shareholders may, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 9, and if
he should so determine, any such business shall not be transacted.
ARTICLE II
----------
DIRECTORS
---------
Section 1. Number of Directors. The number of directors of the
corporation, none of whom needs to be a shareholder, shall in no event be fewer
than six (6) nor more than fifteen (15). The number of directors may be
determined at any annual meeting or at any special meeting called for that
purpose by the affirmative vote of the holders of a majority of the shares
represented at such meeting and entitled to vote on such proposal or by
resolution adopted by the affirmative vote of a majority of the directors then
in office. When so fixed such number shall continue to be the authorized number
of directors until changed by the shareholders or directors by vote as
aforesaid.
Section 2. Nominations. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nominations of persons for election as directors of the corporation may be made
at a meeting of shareholders by or at the direction of the directors, by any
nominating committee or person appointed by the directors, or by any shareholder
of the corporation entitled to vote for the election of directors who complies
with the notice procedures set forth in this Section 2. Nominations by
shareholders shall be made pursuant to timely notice in writing to the Secretary
of the corporation. To be timely, a shareholder's notice shall be delivered to
or mailed and received at the principal executive offices of the corporation not
less than sixty (60) days nor more than ninety (90) days prior to the meeting
provided, however, that in the event that less than seventy-five (75) days'
notice or
<PAGE> 4
prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the fifteenth (15th) day following the
earlier of the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such shareholder's notice shall set forth: (a)
as to each person who is not an incumbent director whom the shareholder proposes
to nominate for election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the corporation which are
beneficially owned by such person, (iv) any other information relating to such
person that is required to be disclosed in solicitation for proxies for election
of directors pursuant to Regulation 14A under the Securities Exchange Act of
1934 (or any comparable successor rule or regulation under such Act); and (b) as
to the shareholder giving the notice (i) the name and record address of such
shareholder, and (ii) the class and number of shares of the corporation which
are beneficially owned by such shareholder. Such notice shall be accompanied by
the written consent of each proposed nominee to serve as a director of the
corporation, if elected. No person shall be eligible for election as a director
of the corporation unless nominated in accordance with the procedures set forth
in this Section 2.
The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
provisions of this Section 2, and if he should so determine, the defective
nomination shall be disregarded.
Section 3. Classification, Election and Term of Office of Directors. The
directors of the corporation shall be divided into classes. If the number of
directors determined in accordance with the provisions of Section 1 of Article
II of these Regulations is nine (9) or more, then the directors will be
classified into three classes, designated "Class A," "Class B" and "Class C,"
respectively. If the number of directors so determined is six (6) or more but
fewer than nine (9), then the directors will be classified into two classes,
designated "Class A" and "Class B," respectively. The number of directors
constituting each class shall be as nearly equal as possible. However, if the
number of directors constituting the whole Board of Directors is not evenly
divisible by the number of classes of directors, then the number of directors
constituting each class will be such that (1) the difference between the number
of directors constituting each class is not greater than one, (2) the number of
Class C directors, if any, is greater than or equal to the number of Class B
directors and the number of Class A directors, and (3) the number of Class B
directors is greater than or equal to the number of Class A directors. Beginning
with the 1991 Annual Meeting of Shareholders, directors designated as Class A
directors and whose terms of office are otherwise expiring at such Annual
Meeting shall be elected for a one-year term of office and Class B directors
shall consist of directors so designated by the Board of
<PAGE> 5
Directors whose terms have not yet expired. At all succeeding annual meetings of
shareholders, successors to the class of directors whose term expires in that
year, if any, will be elected for a three year term. At such time as the
shareholders or directors fix or change the total number of directors comprising
the Board of Directors, they shall also fix, or determine the adjustment to be
made to, the number of director comprising each class of directors; provided,
however, that no reduction in the number of directors shall of itself result in
the removal of or shorten the term of any incumbent director. In the case of any
increase in the number of directors of any class, any additional directors
elected to such class shall hold office for a term which shall coincide with the
term of such class. A director shall hold office until the annual meeting for
the year in which his term expires and until his successor shall be elected and
shall qualify, subject, however, to prior death, resignation, or removal from
office. Election of Directors shall be by ballot whenever requested by any
person entitled to vote at the meeting, but unless so requested, such election
may be conducted in any way approved at such meeting.
Section 4. Removal and Vacancies. Except as otherwise provided by law,
all the directors or all the directors of a particular class, or any individual
director, may be removed from office without assigning any cause, by the
affirmative vote of at least sixty-six and two thirds percent (66-2/3%) of the
shares of the corporation present in person or represented by proxy and entitled
to vote in respect thereof at an annual meeting or at any special meeting duly
called for such purpose.
Whenever any vacancy shall occur among the directors, the remaining
directors shall constitute the directors of the corporation until such vacancy
is filled or until the number of directors is changed as above provided. The
remaining directors, though less than a majority of the whole authorized number
of directors, may, by a vote of a majority of their number, fill any vacancy for
a term ending with the next annual meeting or until a successor is elected and
qualified.
Section 5. Quorum. A majority of the board of directors shall constitute
a quorum for the transaction of business, except that a majority of the
directors in office shall constitute a quorum for filling a vacancy on the
board. Whenever less than a quorum is present at the time and place appointed
for any meeting of the board, a majority of those present may adjourn the
meeting from time to time, until a quorum shall be present.
Section. 6. Annual Meeting. Annual meetings of the board of directors
shall be held immediately following annual meetings of the shareholders, or, if
no annual meeting of the shareholders is held, or if directors are not elected
thereat, then immediately following any special meeting of the shareholders at
which directors are elected. Such annual meeting of directors shall be held at
the same place at which such shareholders' meeting was held.
<PAGE> 6
Section 7. Regular Meetings. Regular meetings of the board of directors
shall be held at such times and places, within or without the State of Ohio, as
the board of directors may, by resolution or by-law, from time to time,
determine. The secretary shall give notice of each such resolution or by-law to
any director who was not present at the time the same was adopted, but no
further notice of such regular meeting need be given. At such meeting, any and
all business within the power of the directors may be transacted.
Section 8. Special Meetings. Special meetings of the board of directors
may be called to be held at such times and places within or without the State of
Ohio by the chairman of the board, the president or the secretary or any two
members of the board of directors.
Section 9. Notice of Annual or Special Meetings. Notice of the time,
place and purposes of each annual or special meeting shall be given to each
director by the secretary or by the person or persons calling such meeting. Such
notice shall state the purpose or purposes of the meeting and may be given in
any manner or method and at such time so that the director receiving it may have
reasonable opportunity to attend the meeting. Such notice shall, in all events,
be deemed to have been properly and duly given if mailed at least 48 hours prior
to the meeting and directed to the residence of the director as shown upon the
secretary's records. The giving of notice shall be deemed to have been waived by
any director who shall attend and participate in such meeting and may be waived,
in writing or by telegram, by any director either before or after such meeting.
Section 10. Compensation. The directors, as such, shall not receive any
salary for their services, but by resolution of the board, retainers and/or a
fixed sum and expenses of attendance, if any, may be allowed for attendance at
each annual, regular or special meeting of the board; provided that nothing
herein contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of the executive committee or of any standing or special committee may by
resolution of the board be allowed such compensation for their services as the
board may deem reasonable, and additional compensation may be allowed to
directors for special services rendered.
Section 11. By-Laws. For the government of its actions, the board of
directors may adopt by-laws consistent with the Articles of Incorporation and
these Regulations.
<PAGE> 7
ARTICLE III
-----------
COMMITTEES
----------
Section 1. Executive Committee. The board of directors may, by
resolution or resolutions passed by a majority of the whole board, create an
executive committee of three or more directors, the members of which shall be
elected by the board of directors to serve during the pleasure of the board.
Unless one of the members shall have been designated as chairman by the board of
directors, the executive committee shall elect a chairman from its own number.
Except as otherwise provided herein and in the resolution creating an executive
committee, such committee shall, during the intervals between the meetings of
the board of directors possess and may exercise all of the powers of the board
of directors in the management of the business and affairs of the corporation,
other than that of filling vacancies among the directors or in any committee of
the directors. The executive committee shall keep full records and accounts of
its proceedings and transactions. All action by the executive committee shall be
reported to the board of directors at its meeting next succeeding such action
and shall be subject to control, revision, and alteration by the board of
directors; provided that no rights of third persons shall be prejudicially
affected thereby. Vacancies in the executive committee shall be filled by the
directors, and the directors may appoint one or more directors as alternate
members of the committee who may take the place of any absent member or members
at any meeting.
Section 2. Meetings of Executive Committee. Subject to the provisions of
these Regulations, the executive committee shall fix its own rules of procedure
and shall meet as provided by such rules or by resolutions of the board of
directors, and it shall also meet at the call of the president of the
corporation or of any two members of the committee. Unless otherwise provided by
such rules or by such resolutions, the provisions of Section 9 of Article II
relating to the notice required to be given of meetings of the board of
directors shall also apply to meetings of the executive committee. A majority of
the executive committee shall be necessary to constitute a quorum. The executive
committee may act in writing, or by cable or by telegraph without a meeting, but
no such action of the executive committee shall be effective unless concurred in
by all members of the committee.
Section 3. Other Committees. The board of directors may by resolution
provide for such other standing or special committees as it deems desirable, and
discontinue the same at pleasure. Each such committee shall have such powers and
perform such duties, not inconsistent with law, as may be delegated to it by the
board of directors. The provisions of Section 1 and Section 2 of this Article
shall govern the appointment and action of such committees so far as consistent,
unless otherwise provided by the board of directors. Vacancies in such
committees shall be filled by the board of directors or as it may provide.
<PAGE> 8
ARTICLE IV
----------
OFFICERS
--------
Section 1. General Provisions. The board of directors shall elect a
president, such number of vice presidents as the board may from time to time
determine, a secretary and treasurer, and, in its discretion, a chairman of the
board of directors. The board of directors may from time to time create such
offices and appoint such other officers, subordinate officers and assistant
officers as it may determine. The president, any vice president who succeeds to
the office of the president, and the chairman of the board shall be, but the
other officers need not be, chosen from among the members of the board of
directors. Any two of such offices, other than that of president and vice
president, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity.
Section 2. Term of Office. The officers of the corporation shall hold
office during the pleasure of the board of directors, and, unless sooner removed
by the board of directors, until the organization meeting of the board of
directors following the date of their election and until their successors are
chosen and qualified. The board of directors may remove any officer at any time,
with or without cause. A vacancy in any office, however created, shall be filled
by the board of directors.
ARTICLE V
---------
DUTIES OF OFFICERS
------------------
Section 1. Chairman of the Board. The chairman of the board, if one be
elected, shall preside at all meetings of the board of directors and shall have
such other powers and duties as may be prescribed by the board of directors.
Section 2. President. The president shall be the active executive
officer of the corporation and shall exercise supervision over the business of
the corporation and over its several officers, subject, however, to the control
of the board of directors. He shall preside at all meetings of shareholders,
and, in the absence of, or if a chairman of the board shall not have been
elected, shall also preside at meetings of the board of directors. He shall have
authority to sign all certificates for shares and all deeds, mortgages, bonds,
contracts, notes, and other instruments requiring his signature; and shall have
all the powers and duties prescribed by Chapter 1701 of the Revised Code of Ohio
and such others as the board of directors may from time to time assign to him.
Section 3. Vice Presidents. The vice presidents shall perform such
duties as are conferred upon them by these Regulations or as may from time to
time be assigned to them by the board of directors or the president. At the
request of the president, or in his absence or disability, the vice president
designated by the president (or in the absence of such
<PAGE> 9
designation, the vice president designed by the board) shall perform all the
duties of the president, and when so acting, shall have all the powers of the
president. The authority of vice presidents to sign in the name of the
corporation all certificates for shares and authorized deeds, mortgages, bonds,
contracts, notes and other instruments, shall be coordinate with like authority
of the president.
Section 4. Secretary. The secretary shall keep minutes of all the
proceedings of the shareholders and board of directors and shall make proper
record of the same, which shall be attested by him; shall have authority to sign
all certificates for shares, and all deeds, mortgages, bonds, contracts, notes,
and other instruments executed by the corporation requiring his signature; give
notice of meetings of shareholders and directors; produce on request at each
meeting of shareholders for the election of directors a certified list of
shareholders arranged in alphabetical order; keep such books as may be required
by the board of directors; and perform such other and further duties as may from
time to time be assigned to him by the board of directors or by the president.
Section 5. Treasurer. The treasurer shall have general supervision of
all finances; he shall receive and have in charge all money, bills, notes,
deeds, leases, mortgages and similar property belonging to the corporation, and
shall do with the same as may from time to time be required by the board of
directors. He shall cause to be kept adequate and correct accounts of the
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, stated capital, and shares,
together with such other accounts as may be required, and upon the expiration of
his term of office shall turn over to his successor or to the board of directors
all property, books, papers and money of the corporation in his hands; and he
shall perform such other duties as from time to time may be assigned to him by
the board of directors.
Section 6. Assistant and Subordinate Officers. The board of directors
may appoint such assistant and subordinate officers as it may deem desirable.
Each such officer shall hold office during the pleasure of the board of
directors, and perform such duties as the board of directors may prescribe.
The board of directors may, from time to time, authorized any officer to
appoint and remove subordinate officers, to prescribe their authority and
duties, and to fix their compensation.
Section 7. Duties of Officers May be Delegated. In the absence of any
officer of the corporation, or for any other reason the board of directors may
deem sufficient, the board of directors may delegate, for the time being, the
powers or duties, or any of them, of such officer to any other officer, or to
any director.
<PAGE> 10
ARTICLE VI
----------
INDEMNIFICATION OF DIRECTORS, OFFICERS
--------------------------------------
AND MEMBERS OF COMMITTEES
-------------------------
The corporation shall indemnify any director or officer and any former
director or officer of the corporation and any such director or officer who is
or has served at the request of the corporation as a director, officer or
trustee of another corporation, partnership, joint venture, trust or other
enterprise (and his heirs, executors and administrators) against expenses,
including attorney's fees, judgements, fines and amounts paid in settlement,
actually and reasonably incurred by him by reason of the fact that he is or was
such director, officer or trustee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative to the full extent permitted by applicable law. The
indemnification provided for herein shall not be deemed to restrict the right of
the corporation (i) to indemnify employees, agents and others to the extent not
prohibited by such law, (ii) to purchase and maintain insurance or furnish
similar protection on behalf of or for any person who is or was a director,
officer, employee or agent of the corporation, or any person who is or was
serving at the request of the corporation as a director, officer, trustee,
employee or agent of another corporation, joint venture, partnership, trust, or
other enterprise against any liability asserted against him or incurred by him
in any such capacity or arising out of his status as such, and (iii) to enter
into agreements with persons of the class identified in clause (ii) above
indemnifying them against any and all liabilities (or such lesser
indemnification as may be provided in such agreements) asserted against or
incurred by them in such capacities.
ARTICLE VII
-----------
CERTIFICATES FOR SHARES
-----------------------
Section 1. Form and Execution. Certificates for shares, certifying the
number of full-paid shares owned, shall be issued to each shareholder in such
form as shall be approved by the board of directors. Such certificates shall be
signed by the president or a vice president and by the secretary or an assistant
secretary or the treasurer or an assistant treasurer; provided, however, that if
such certificates are countersigned by a transfer agent and/or registrar the
signatures of any of said officers and the seal of the corporation upon such
certificates may be facsimiles, engraved, stamped or printed. If any officer or
officers, who shall have signed, or whose facsimile signature shall have been
used, printed or stamped on any certificate or certificates for shares, shall
cease to be such officer or officers, because of death, resignation or
otherwise, before such certificate or certificates shall have been delivered by
the corporation, such certificate or certificates, if authenticated by the
endorsement thereon of the signature of a transfer agent or
<PAGE> 11
registrar, shall nevertheless be conclusively deemed to have been adopted by the
corporation by the use and delivery thereof and shall be as effective in all
respects as though signed by a duly elected, qualified and authorized officer or
officers, and as though the person or persons who signed such certificate or
certificates, or whose facsimile signature or signatures shall have been used
thereon, had not ceased to be an officer or officers of the corporation.
Such certificates for shares shall be transferable in person or by
attorney, but, except as hereinafter provided in the case of lost, mutilated or
destroyed certificates, no transfer of shares shall be entered upon the records
of the corporation until the previous certificate, if any, given for the same,
shall have been surrendered and cancelled.
Section 2. Lost, Mutilated or Destroyed Certificates. If any certificate
for shares is lost, mutilated or destroyed, the board of directors may authorize
the issue of a new certificate in place thereof upon such terms and conditions
as it may deem advisable. The board of directors in its discretion may refuse to
issue such new certificate until the corporation has been indemnified to its
satisfaction and until it is protected to its satisfaction by a final order or
decree of a court of competent jurisdiction.
Section 3. Registered Shareholders. A person in whose name shares are of
record on the books of the corporation shall conclusively be deemed the
unqualified owner thereof for all purposes and to have capacity to exercise all
rights of ownership. Neither the corporation nor any transfer agent of the
corporation shall be bound to recognize any equitable interest in or claim to
such shares on the part of any other person, whether disclosed upon such
certificate or otherwise, nor shall they be obliged to see to the execution of
any trust or obligation.
ARTICLE VIII
------------
FISCAL YEAR
-----------
The fiscal year of the corporation shall end on the thirtieth day of
September in each year, or on such other day as may be fixed from time to time
by the board of directors.
ARTICLE IX
----------
SEAL
----
The board of directors shall provide a suitable seal containing the name
of the corporation. If deemed advisable by the board of directors, duplicate
seals may be provided and kept for the purposes of the corporation.
<PAGE> 12
ARTICLE X
---------
AMENDMENTS
----------
Section 1. These Regulations may be altered, changed or amended in any
respect or superseded by new Regulations, in whole or in part, by the
affirmative vote of the holders of a majority of the shares of the corporation
present in person or by proxy and entitled to vote thereon, at an annual or
special meeting duly called for such purpose.
Section 2. Notwithstanding the provisions of Section 1 of Article X
hereof and notwithstanding the fact that a lesser percentage may be specified by
law or in any agreement with any national securities exchange or any other
provision of these Regulations, the amendment, alteration, change or repeal of,
or adoption of any provisions inconsistent with, Sections 1, 3 and 4 of Article
II of these Regulations shall require the affirmative vote, at an annual or
special meeting duly called for such purpose, of the holders of shares
representing at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of the corporation, unless such amendment, alteration, change, repeal or
adoption has been recommended by at least two-thirds of the Board of Directors
of the corporation then in office, in which event the provisions of Section 1 of
Article X hereof shall apply.
Amended January 30, 1992
<PAGE> 1
Exhibit 10.15
EMPLOYMENT AGREEMENT
Anthony & Sylvan Pools Corporation, an Ohio corporation (the "Company")
and Stuart D. Neidus (the "Executive") agree as follows:
1. Employment and Duties.
(a) The Company agrees to employ the Executive, and the
Executive agrees to serve the Company, as the Company's Chief Executive Officer
and Chief Financial Officer. The Executive shall report to the Company's Board
of Directors and shall have such powers and duties as are customarily performed
by Chief Executive and Chief Financial Officers of companies similar in size to
the Company, together with such other duties, consistent with his positions as
set forth above, as may be reasonably requested by the Board of Directors.
(b) On a day-to-day basis, the Executive shall (i) devote
substantially all of his working time to the business and affairs of the
Company, acknowledging that the Executive is also employed as an executive
officer of Essef Corporation ("Essef"). So long as it does not unreasonably
interfere with his employment obligations to the Company hereunder, the
Executive shall be entitled to attend to outside investments, and subject to
prior approval of the Board of Directors, serve as a director of a corporation
which does not compete with the Company (as provided in Section 10 hereof) or as
a director, trustee or officer of or otherwise participate in educational,
welfare, social, religious, charitable and civic organizations, and (ii) use his
good faith efforts to advance the interests of the Company and to improve the
value of the Company to its shareholders.
2. Term. The Company's employment of the Executive shall commence
on September __, 1998 and expire on December 31, 2000. Unless
<PAGE> 2
terminated as provided in Section 7 hereof, this Agreement shall be extended
automatically as of each December 31 thereafter for one (1) additional year
period with such modified terms as mutually agreed.
3. Compensation.
(a) The Executive's annual base salary ("base salary") during
the term of this Agreement shall be at least Two Hundred Twenty Thousand Dollars
(USD $220,000), such base salary to be reviewed annually by the Compensation
Committee of the Board of Directors or an authorized subcommittee thereof (the
"Committee").
(b) In addition to the base salary, the Company shall pay the
Executive a bonus targeted at sixty (60%) of his base salary for each year
("Target Bonus"), and the Committee shall determine the appropriate target
earnings per share ("Targeted Earnings Per Share") or other performance measure
for bonus purposes. There shall be no cap on bonus potential. Such bonus shall
be determined and paid within thirty (30) days after the Company's audited
financial statements become available.
(c) Initial Options.
(i) concurrent with the sale of shares of the Company
to the public in an initial public offering and subject to the limitation in
(iii) below, the Company hereby agrees to grant to the Executive options (the
"Initial Options") to purchase One Hundred Thousand (100,000) shares of the
Company's common stock (the "Shares") at the price and subject to the following
terms and conditions. The Initial Options shall vest as of the date of sale of
shares in the Company's initial public offering (the "Commencement Date").
(ii) The exercise price per Share for the Initial
Options shall be the offering price to the public in the initial public
offering.
2
<PAGE> 3
(iii) Regardless of the fact that the Initial Options
are deemed to vest on the Commencement Date, the Executive may exercise Initial
Options only in the percentages and at the times set forth below:
0% prior to the first anniversary of the Commencement Date;
20% at any time after the first anniversary of the Commencement Date;
40% at any time after the second anniversary of the Commencement Date;
60% at any time after the third anniversary of the Commencement Date;
80% at any time after the fourth anniversary of the Commencement Date;
100% at any time after the fifth anniversary of the Commencement Date;
(d) Taxes. If all or any of the amounts payable to the
Executive under this Agreement (together with all other payments of cash or
property, whether pursuant to this Agreement or otherwise, including, without
limitation, the issuance of shares or options) constitutes "excess parachute
payments" within the meaning of Section 280G of the Code that are subject to the
excise tax imposed by Section 4999 of the Code (or any similar tax or
assessment), the amounts payable hereunder shall be increased to the extent
necessary to place the Executive in the same after-tax position as he would have
been in had no such tax assessment been imposed on any such payment paid or
payable to the Executive under this Agreement or any other payment that the
Executive may receive in connection therewith. The determination of the amount
of any such tax or assessment and the incremental payment required hereby in
connection therewith shall be made by the accounting firm employed by the
Executive within thirty (30) calendar days after such payment and said
incremental payment shall be made within five (5) calendar days after
determination has been made. If, after the date upon which the payment required
by this Section 3(d) has been made, it is determined (pursuant to final
3
<PAGE> 4
regulations or published rulings of the Internal Revenue Service, final judgment
of a court of competent jurisdiction, Internal Revenue Service audit assessment,
or otherwise) that the amount of excise or other similar taxes or assessments
payable by the Executive is greater than the amount initially so determined,
then the Company shall pay the Executive an amount equal to the sum of: (i) such
additional excise or other taxes, plus (ii) any interest, fines and penalties
resulting from such underpayment, plus (iii) an amount necessary to reimburse
the Executive for any income, excise or other tax assessment payable by the
Executive with respect to the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii), in the manner described above in
this Section 3(c). Payment thereof shall be made within five (5) calendar days
after the date of such subsequent determination. If, after the date upon which
the payment required by this Section 3(c) has been made to the Executive, it is
determined that the Executive is entitled to receive a refund of all or part of
such payment, then the Executive shall pay to the Company all amounts received
by the Executive as a refund of any such overpayment of excise or other taxes.
4. Benefits. During the term of this Agreement, the Executive and his
eligible dependents shall be entitled to participate in and receive benefits
under any stock option or profit-sharing plan, health, disability, medical
insurance or other employee welfare or benefit plan or arrangement made
generally available by the Company during the term of this Agreement to its
executives and key management employees.
5. Car. During the term of this Agreement, the Company shall provide
the Executive with an automobile and shall pay for operating expenses incurred
in connection with the use of the automobile, including the costs of insurance,
gas, maintenance and car phone. The costs associated with such automobile may be
allocated between the Company and Essef.
4
<PAGE> 5
6. Vacation. The Executive shall be entitled to the number of paid
vacation days in each calendar year determined by the Board from time to time.
7. Disability or Death; Resignation; Termination for Cause; Other
Terminations.
(a) Disability or Death. If the Executive is incapacitated for
a period of six (6) consecutive months so that he cannot perform his duties
hereunder on a full-time basis, then either the Company or the Executive may
give written notice to the other terminating the Executive's employment
effective thirty (30) days thereafter (the "Disability Termination Date"). The
Company shall continue to provide salary, medical coverage, disability and group
life insurance to the Executive for one (1) year after the earlier of the
Disability Termination Date or death. In the event of the Executive's disability
or death any stock options that are not yet exercisable shall immediately become
exercisable. The Executive or his estate may exercise any options held at the
date of death or the Disability Termination Date for one (1) year after such
date. In the event of death or disability, the Company shall pay to the
Executive the prorated portion (through the applicable termination date) of the
Executive's Target Bonus that would have been paid had the Executive been
employed by the Company at the end of the fiscal year in which the applicable
termination date occurred. Such Target Bonus shall be calculated according to
actual Company results for the respective fiscal year and paid at the same time
other Company bonuses are paid. Except as set forth below, if the Executive dies
prior to the termination of his employment or if notice of termination for
disability is given as provided above, the Company's obligations hereunder shall
terminate as of the earlier of the Executive's death or the Disability
Termination Date.
(b) Resignation. If the Executive's employment is terminated
by reason of his voluntary resignation, all of the Company's obligations
hereunder shall terminate as of the termination date. All unexercised options
for shares, if any, then outstanding, both vested and unvested, shall be
automatically forfeited and canceled by the Company.
(c) Termination for Cause. If the Company terminates the
Executive's employment for cause (as defined below), all of the Company's
obligations hereunder shall
5
<PAGE> 6
immediately terminate as of the termination date. All unexercised stock options,
both vested and unvested, shall be automatically forfeited and canceled by the
Company. As used herein, "for cause" shall mean (i) gross misconduct by the
Executive that is materially inconsistent with the terms hereof, or (ii)
material failure by the Executive to perform his duties, either of which
continues after written notice thereof and a fifteen (15) day chance to cure or
(iii) the Executive's conviction for committing a felony.
(d) Other Terminations. If the Company terminates the
Executive's employment other than for cause (including failing to extend the
term at the end of any year), both the Company's and the Executive's obligations
hereunder shall immediately terminate as of the termination date; provided,
however, that (i) any stock options that are not yet exercisable shall
immediately become exercisable and the Executive may exercise within one (1)
year from the date the Company delivers notice of termination (the "Termination
Date") any options held by him on the Termination Date and (ii) the Company
shall continue to provide salary and medical, group life and disability
insurance (collectively, "insurance benefits") to the Executive until the later
of December 31, 2000 or one (1) year after the Termination Date. In addition the
Company shall pay the prorated portion (through the Termination Date) of the
Executive's Target Bonus that would have been paid had the Executive been
employed by the Company at the end of the year in which the Termination Date
occurred. Such Target Bonus will be calculated according to actual Company
results for the year and paid at the same time other Company bonuses are paid.
6
<PAGE> 7
If (i) the Company materially changes the Executive's duties and
responsibilities as set forth in Section 1 without his consent; or (ii) there
occurs a "change in control" (as hereinafter defined) of the Company, then in
any such event the Executive shall have the right to terminate his employment
with the Company, but such termination shall not be considered a voluntary
resignation or termination of such employment or of this Agreement by the
Executive but rather a discharge of the Executive by the Company without "cause"
under this Section 7(d).
The term "change in control" means the first to occur of the following
events:
(i) when any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof, including
a "group" as defined in Section 13(d) of the Exchange Act, but
excluding the Company and any employee benefit plan sponsored or
maintained by the Company (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing more than fifty
percent (50%) of the combined voting power of the Company's then
outstanding securities; or
(ii) The completion of a transaction requiring shareholder
approval for the acquisition of substantially all of the stock or
assets of the Company by an entity other than the Company or any merger
of the Company into another company and the Company is not the
surviving company.
Notwithstanding anything to the contrary contained in this Agreement, upon the
occurrence of a "change of control" of the Company any stock options granted to
the Executive shall immediately become exercisable by the Executive at any time.
7
<PAGE> 8
8. Trade Secrets: Confidential and Proprietary Information. The
Executive shall not at any time or in any manner, either directly or indirectly,
divulge, disclose or communicate to any person, firm, company, corporation or
business in any manner whatsoever any confidential information relating to the
business of the Company, including without limitation, the Company's customer
list, pricing policies, trade secrets, know-how, product designs, strategic
plans and similar types of information. This Section 8 shall be interpreted with
the Executive's role as Chief Executive and Chief Financial Officer and liaison
with the securities markets and the investing public in general in mind. The
foregoing restrictions shall not apply to the extent that such information (a)
is obtainable in the public domain, (b) becomes obtainable in the public domain,
except by reason of the breach by the Executive of the terms hereof, or (c) is
required to be disclosed by rule of law or by order of a court or governmental
body or agency. This Section 8 shall remain in full force and effect for a
period of ten (10) years after expiration or termination of this Agreement for
any reason.
9. Covenant Not to Compete. During the term of this Agreement and for a
period of five (5) years thereafter the Executive will not, without the
Company's prior written consent, directly or indirectly engage in, make any
investment in or have any interest in any business in competition with the
business of the Company; and the Executive will not advise, assist or render
services either directly or indirectly to any person, firm, company, corporation
or business other than the Company with reference to any business in competition
with the business engaged in by the Company during the Executive's employment by
the Company. Notwithstanding the foregoing, the ownership of securities of any
business competing with the Company, if such securities are publicly traded on a
national securities market and constitute less than five percent (5%) of the
outstanding stock thereof, shall not constitute a violation of this provision.
For
8
<PAGE> 9
purposes of this Section 9, a business in competition with the Company shall
mean any business engaged in the manufacture, design, installation processing,
sale or distribution of products that are the same as or similar to those of the
Company at any time during the term of this Agreement.
10. Notices. All notices, requests, demands and other communications
made or given in connection with this Agreement shall be in writing and shall be
deemed to have been duly given (a) if delivered, at the time delivered or (b) if
mailed, at the time mailed at any general or branch United States Post Office
enclosed in a registered or certified postage paid envelope addressed to the
address of the respective parties as follows:
To the Company: Anthony & Sylvan Pools Corporation
220 Park Drive
Chardon, OH 44024
To the Executive: Stuart D. Neidus
7860 Sugarbush Lane
Gates Mills, OH 44040
or to such other addresses as the party to whom notice is to be given may have
previously furnished to the other party in writing in the manner set forth
above, provided that notices of changes of address shall only be effective upon
receipt.
11. Modification and Waivers. No provisions of this Agreement may be
modified or discharged unless such modification or discharge is authorized by
the Board of Directors and is agreed to in writing, signed by the Executive and
by another executive officer of the Company. No waiver by either party hereto of
any breach by the other party hereto or any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
9
<PAGE> 10
12. Entire Agreement. This Agreement constitutes the entire agreement
of the parties hereto relating to the subject matter hereof, and there are no
written or oral terms or representations made by either party other than those
contained herein.
13. Governing Law. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the laws of
the State of Ohio.
14. Invalidity. The unenforceability or invalidity of any provision of
this Agreement shall not affect the enforceability or validity of the balance of
the Agreement. In the event that any such provision should be or becomes invalid
for any reason, such provision shall remain effective to the maximum extent
permissible, and the parties shall consult and agree on a legally acceptable
modification giving effect to the commercial objectives of the unenforceable or
invalid provision, and every other provision of this Agreement shall remain in
full force and effect.
15. Successors. This Agreement shall inure to the benefit of, and be
enforceable by, the parties' successors, representatives, executors,
administrators or assignees.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
September ___, 1998.
ANTHONY & SYLVAN POOLS CORPORATION
By:
- ----------------------------------- --------------------------------
Stuart D. Neidus
10
<PAGE> 1
Exhibit 13
ESSEF ANNUAL REPORT
1998
SEIZING strategic opportunities
<PAGE> 2
HIGHLIGHTS
<TABLE>
<CAPTION>
COMPOUND ANNUAL GROWTH RATE 36.2%
<S> <C>
1994 $126,811
1995 $149,255
1996 $193,788
1997 $306,061
1998 $436,027
NET SALES - in Thousands
</TABLE>
<TABLE>
<CAPTION>
COMPOUND ANNUAL GROWTH RATE 32.6%
<S> <C>
1994 $10,947
1995 $10,777
1996 $16,592
1997 $26,019
1998 $33,857
INCOME FROM OPERATIONS - Adjusted in Thousands
</TABLE>
<TABLE>
<CAPTION>
COMPOUND ANNUAL GROWTH RATE 23.4%
<S> <C>
1994 $0.53
1995 $0.56
1996 $0.68
1997 $1.06
1998 $1.23
EPS - Adjusted in Dollars
</TABLE>
<TABLE>
<CAPTION>
COMPOUND ANNUAL GROWTH RATE 31.3%
<S> <C>
1994 $ 5.89
1995 $ 7.23
1996 $ 7.23
1997 $15.68
1998 $17.50
STOCK PRICE - in Dollars
</TABLE>
"1998 was a year of significant strategic progress. Your company is well
positioned to continue its outstanding performance."
<PAGE> 3
ESSEF CORPORATION
Essef Corporation is a leader in the world of water. Its vision and acquisition
strategies have allowed it to achieve an impressive leadership position in each
of its segments. Under Pac-Fab, the Company supplies integrated pool and spa
equipment systems, including filters, pumps, heaters, controls, valves, lights,
accessories, and tile -- products which are widely used in residential and
commercial pools, water parks and aquariums. The Company also owns Anthony &
Sylvan Pools, the world's largest and preeminent designer and installer of
residential in-ground concrete swimming pools. These two pool business segments
are complemented by the Water Treatment and Systems Equipment Segment which
includes Essef's founding business, the Structural Group. As one of the largest
providers of composite components and subsystems for water and other liquids,
this segment specializes in the movement, treatment, and storage of water,
delivering advanced process technologies and integrated systems to end users the
world over.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data) 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $436,027 $306,061 + 42.5%
Income From Operations - Adjusted 33,857 26,019 + 30.1%
Income From Operations 33,857 22,519 + 50.3%
EBITDA - Adjusted 45,755 33,504 + 36.6%
Net Income 16,578 11,766 + 40.9%
Net Income Per Share 1.23 .89 + 38.2%
Net Income Per Share - Adjusted 1.23 1.06 + 16.0%
Return on Shareholders' Equity 23.1% 20.3% + 13.8%
Book Value Per Share $ 7.08 $ 5.62 + 26.0%
Stock Price at September 30 17.50 15.68 + 11.6%
Market Capitalization 206,815 182,595 + 13.3%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
All share related data has been restated to reflect the 10% stock dividend and
the adoption of Statement of Financial Accounting Standard No. 128, "Earnings
per Share," which occurred in 1998. Adjusted income from operations, EBITDA and
net income per share in 1997 exclude plant closure costs of $3.5 million.
<PAGE> 4
LETTER to Shareholders
Sales set a new record of $436,027,000, an increase of 42.5%, with most of the
growth coming from acquisitions. Our return on shareholders' equity was 23.1%,
resulting from net income of $16,578,000 or $1.23 per share. The EPS increased
38.2% from the previous year's $.89. These significant gains were made despite a
difficult year in our Water Treatment Segment and a variety of unusual items
that cost us at least $.12 per share.
Our capital structure had $117,334,000 of debt and $83,678,000 of equity at
year-end, continuing a more leveraged capital structure than we have had
historically. The increase in our debt is primarily attributable to
acquisitions. The Anthony & Sylvan ("A&S") initial public offering ("IPO")
announced in May 1998, which we are planning for fiscal 1999, should serve to
reduce our leverage. Regardless of the timing of the IPO, the combination of our
strong cash flow, our positive earnings expectations and low interest rates
leaves us comfortable with the leverage.
1998 REVIEW
1998 was a year in which we made significant strategic progress and our people
overcame unanticipated obstacles and setbacks to produce good financial results.
We developed and validated a growth model for A&S and determined that a real
opportunity exists in the pool industry for a consolidator of pool builders. The
growth model incorporates a balanced approach between internal growth and
acquisitions. Many owners of pool businesses have approached us, expressing an
interest in selling us their companies. Discussions with these owners confirm
our belief that there is an opportunity to consolidate this industry as no
viable exit strategy currently exists for the many founder- owners of local pool
businesses. A&S intends to meet that need. Pac-Fab made significant strategic
progress with its commitment to a product design center in India where we expect
to speed up and reduce the cost of developing new products and, in broadening
its product line, with the acquisitions of Rainbow, Cozad & O'Hara and Thompson
Tile along with the introduction of several new products. The Water Treatment
Segment continued its growing commitment to Asia with a larger sales force in
the region and new product manufacturing capabilities in India. In last year's
letter, I wrote you that we were studying the best way for Essef shareholders to
benefit from the investment that had been made in A&S, the swimming pool sales
and installation business that was acquired in the General Aquatics transaction.
I am very pleased to report that we concluded that an IPO of 15-20% of A&S
shares, and a subsequent spin-off of the remaining A&S shares to Essef
shareholders, would likely create the greatest value for Essef shareholders.
Unfortunately, the collapse of the IPO market delayed A&S's IPO as well.
Although it is uncertain when that market will revive, we have filed a
Registration Statement with the Securities and Exchange Commission and completed
much of the work related to the IPO. Accordingly, when the markets turn, and if
we obtain a favorable tax ruling from the IRS, we will be ready to complete the
IPO and spin-off. We believe the completion of the IPO and spin-off will clarify
Essef's position as a manufacturer; unlock some additional value for Essef
shareholders; give Essef shareholders a choice as to whether they wish to
participate in a consolidation of the pool sales and installation industry; and
finally, allow A&S to most effectively pursue its own growth strategy.
I characterize the year as good rather than outstanding because we had a variety
of unusual matters that cost us at least $.12 per share, without which it would
have been an outstanding year. Specifically, unanticipated expenses were
incurred from consolidation and reorganization inefficiencies in the early part
of the year from combining Pac-Fab's west coast plant into our recently acquired
General Aquatics Moorpark, California plant; and from two lawsuits, one in which
we are the plaintiff and the other dating back many years. These costs were
partly offset when a senior officer resigned and stock option compensation
expense recorded in prior years was reversed. In addition, the Water Treatment
Segment had a difficult year, mainly at Codeline, where we introduced a new
product line, reorganized production processes, and installed a new computer
system in a declining project market which together overwhelmed our ability to
deal with so much short-term change. Although positioned well for the future,
start-up delays in India through the first half of the year prevented a
contribution to 1998 earnings. On balance, the impact of the economic conditions
in the various countries in which we operate was about as expected. Asia,
Eastern
2|3
<PAGE> 5
Europe and project markets worldwide were weaker than expected, but this
weakness was offset by a much stronger than expected Western European market and
a strong U.S. pool market.
Our stock price increase during the year was gratifying, but its decline after
the July stock market break and its subsequent languishing leave us disappointed
and limits our flexibility. Disappointed, because our record results for the
year and our outlook for 1999 resulted in an increase in our market
capitalization of only 13% from one year ago. Limited, because we are reluctant
to do a stock offering or to issue stock for acquisitions at these prices.
Indeed, we believe the stock is so attractive that our Board authorized a
$10,000,000 stock repurchase program, which at today's prices represents about
5% of our outstanding stock.
We have had an outstanding record of sales and earnings growth for the past
several years. Since 1994, sales have grown 36.2% per year compounded, income
from operations 32.6%, and net earnings 24.1%. We have had the good fortune to
operate in fragmented industries; we have had the vision to define a growth
strategy within those industries; and, we have had the ability to make
acquisitions and to integrate those acquisitions to create value. However, we
have not yet persuaded the investment community that we deserve a multiple
frequently accorded those with similar records. We are currently trading at a
price/earnings multiple of 14 based on trailing earnings when the S&P SmallCap
600 index and the S&P 500 index both trade at 30x. Neither has the record of
growth that we have in recent years. With the multiple that we have, it is a
challenge, which we have met so far through an increasingly leveraged capital
structure, to take advantage of the many opportunities we see in our businesses.
ORGANIZATION
Gerry Hornick, an Executive Vice President of the Company, delayed his
retirement to manage the Water Treatment Segment for a year. We thank Gerry for
his 30 years of loyal service and many contributions and wish him well in
retirement. He will be fondly remembered by his many friends. We are taking the
opportunity created by Gerry's retirement to reorganize the Water Treatment
Segment into one global business rather than managing it as a number of small,
autonomous businesses and expect to have this new, more effective but lower cost
organization in place in the next few months.
Stu Neidus was appointed Chairman and CEO of A&S. The appointment recognizes
Stu's contribution to Essef as well as his unique qualifications to lead A&S
after the spin-off. While we will miss Stu at Essef after the spin-off, we wish
him well and believe that he will go on to create great value at A&S.
1999 OUTLOOK
Our planning anticipates present economic conditions continuing. Modest economic
growth should occur in the U.S. and Europe, while the economies that have been
severely affected by the recent economic crises should stay at about their
present levels.
Given those conditions, 1999 sales should exceed $500,000,000 for the first time
and earnings should be $1.45-$1.55 per share for the business as it now exists.
We are well satisfied with our accomplishments during this challenging year. Not
only did our capable people adjust to surprises and overcome obstacles to
produce good short-term results, but we also continued making strategic
investments and acquisitions to build long-term value. Today we are a more
valuable company with better prospects than a year ago, and I am confident that
your company is well positioned to continue its outstanding performance.
/s/Thomas B. Waldin
Thomas B. Waldin
President and Chief Executive Officer
December 9, 1998
<PAGE> 6
Fiber optic lighting and MiniMax(TM)
heaters have found a new home in the
growing above-ground pool market.
<PAGE> 7
SWIMMING POOL & SPA EQUIPMENT
Fiscal 1998 marked another year of aggressive expansion through strategic
acquisitions and new product introductions for our pool equipment segment.
Pac-Fab enhanced its position as a single-source supplier by bringing customer
convenience and service to a new high. The swift integration of acquisitions has
resulted in gains in productivity and capacity utilization, which are reflected
in our improved profitability, quality and customer service. The most
significant integration was the completion of the consolidation of the Purex
plant in City of Industry, California, into American Products' Moorpark,
California plant acquired in May 1997. In addition, the following three current
year acquisitions expanded Pac-Fab's broad product line:
- - Rainbow Lifegard in El Monte, California is a leading manufacturer of
maintenance, testing, and cleaning accessories for spas and pools, spa filters,
and small-scale aquarium and aquaculture equipment. This broad product line,
which stretches across numerous industries and channels, and the addition of new
distributors in key international markets presents excellent export sales growth
opportunities. Pac-Fab is now well positioned to develop complementary industry
and channel specific products for future growth in these new, emerging markets.
These opportunities will continue to move Pac-Fab toward becoming the leading
global pool equipment company.
- - Cozad & O'Hara in Anaheim, California and Thompson Ceramic Tile in Pompano
Beach, Florida. These leading regional pool tile distributors were joined with
Pac-Fab's existing pool tile distribution business, Quality Pool Tile located in
Atlanta, Georgia, to form a new company, National Pool Tile Group. Together they
will provide national coverage as a leading single-source supplier of pool tile.
New products and market share gains were also components of Pac-Fab's growth in
1998. Pac-Fab's new 100,000 BTU MiniMax(TM) pool and spa heater and the
AquaNeon(TM) series of fiber optic lighting products were new breakthroughs in
the residential above-ground pool market. Similarly, the commercial business saw
the introduction of the up to 900,000 BTU MiniMax(TM) heater and two series of
composite pumps. Positive reaction to these products indicates they will be
significant contributors in the coming years. Market share gains were
experienced in most of the regional U.S. markets, due in large measure to our
customer focus, strong sales teams and innovative products. The most significant
of these gains belongs to Pac-Fab's automatic pool control business, whose sales
increased by more than 20% in 1998.
1998 also saw the establishment of Pac-Fab's engineering and design center in
India. The highly skilled work force in India will give Pac-Fab 24-hour-a-day
engineering capability and shorter product development cycles.
With the integration of its recent acquisitions, Pac-Fab can now boast a well
aligned product base, a manufacturing facility located on each coast, excellent
engineering capabilities and a strong sales force, all of which position the
pool equipment segment for continued profitable growth in the U.S. and abroad.
[Picture]
MiniMax(a) above-ground
residential heater
[Picture]
Rainbow pool accessories
[Picture]
MiniMax(a) commercial heater
[Picture]
Our recently formed National Pool Tile Group offers a broad array of pool and
spa tile.
4|5
<PAGE> 8
WATER TREATMENT & SYSTEMS EQUIPMENT
Our constant focus on customer service and market opportunities helped us
maintain market share in an increasingly competitive environment. However, 1998
was a year of challenge for the Water Treatment Segment as the emerging markets
in Asia and Eastern Europe were soft and project business was weaker than
expected.
As water treatment system manufacturers around the world continue to
consolidate, the Structural Group is well positioned to serve these growing
global companies. Our four manufacturing facilities, including our new facility
in India, are convenient to both the established and the emerging distribution
channels allowing us to offer quick delivery and low freight costs. Although
start-up delays prevented India from contributing to the Group's performance in
1998, we believe this plant's broad manufacturing capabilities will prove
significant in 1999 and beyond. In addition, we operate sales offices in six
global markets to serve pressure vessel users quickly and efficiently throughout
the world.
To position the Group for better performance in the coming years, we recently
consolidated the manufacturing and administrative functions of our Pressure
Vessel and WellMate(TM) operations in Chardon, Ohio. This consolidation will
lower the cost and increase the flexibility of our manufacturing processes.
Structural's broad understanding of composite technology is creating exciting
new market opportunities. Acceptance of composite vessels for applications in
hot water storage in both the U.S. and overseas is growing. Currently, the
market is dominated by steel vessels that have a high corrosion probability and
a short useful life. Composite tanks represent an attractive economic and
long-term solution. Codes and approval barriers for the widespread use of our
technology are being cleared now. Key projects with leading producers of hot
water boilers are being undertaken to spearhead high volume market penetration
in this area in the coming years.
1998 saw the expansion of our Asia/Pacific sales team, which made significant
sales gains in China by taking advantage of the quicker delivery and lower costs
of pressure tanks and membrane housings coming from our plant in India. In
Europe, we took advantage of emerging opportunities in Poland, Turkey and
Hungary. Despite strong competition and an environment recovering from
recession, Structural Europe has been able to increase its market share in every
business segment. A key factor in that success was the strong performance of
Euroimpex, our Italian Distribution Center, which set record sales and earnings
based primarily on excellent customer service. The Middle East region also
performed above expectations in only its second year of operations.
In the areas of ultra-pure water and industrial microfiltration, Codeline(TM)
products continue to dominate. Last year saw the introduction of an entirely new
line of highly versatile membrane housings, allowing customers to take advantage
of higher flows and lower pressures. Proprietary manufacturing methods, expanded
capacity in both California and India, and a new computer system were instituted
in 1998. Although these costs negatively impacted Codeline's 1998 results, the
investments further strengthen Codeline's ability to respond quickly to
increases in global demand.
WellMate(TM) continued its growth as it benefited from cost reductions in the
design and manufacture of its hydropneumatic vessels. These vessels are used in
residential and commercial water systems and pressure boosting applications.
With an expanded global sales force, WellMate is now positioned for significant
growth.
Finally, in July 1998 we disposed of the Enpac operation because it no longer
fit our business strategy. This will enable us to increase our focus on
long-term composite pressure vessel technology.
[Picture]
Water distribution system
[Picture]
Codeline(TM) membrane housing
[Picture]
Water system pressure tank
6|7
<PAGE> 9
Structural pressure vessels and Codeline membrane
housings combine to remove impurities in an
ultra-pure water closed loop system for
manufacturing silicon chips.
<PAGE> 10
As the world's largest builder of
residential in-ground concrete pools, we
fulfill the backyard dreams of thousands
of families every year.
<PAGE> 11
ANTHONY &
SYLVAN
Where America Swims(TM)
SWIMMING POOL SALES & INSTALLATION
With more than five decades of experience in both the design and installation of
residential in-ground concrete swimming pools, Anthony & Sylvan Pools continues
its position of leadership as the largest builder in the United States,
fulfilling the backyard dreams of thousands of families across the country every
year. The slogan "Where America Swims"(TM) represents not only our roster of
over 330,000 pools built, but our numerous design centers operating within 24
metropolitan markets in the country.
In 1998, Anthony & Sylvan achieved significant strategic growth by opening five
new sales offices, expanding within existing markets, and penetrating important
new markets through acquisitions. The purchase in January 1998 of Tango Pools in
Las Vegas enabled us to gain market share in one of the fastest growing cities
in the country. Our combined organization is poised to take advantage of new
residential development and stimulate the overall market for pools and spas in
Nevada.
Similarly, the acquisition of Pools by Andrews in August 1998 rapidly
facilitated our entry into six new major markets in Florida, including Miami,
Ft. Lauderdale, Palm Beach, Jacksonville, Tampa, and Ft. Myers. The combination
of Andrews and Anthony & Sylvan offices in Orlando also creates a leader in that
fast-growing market.
The addition of these two successful pool companies brings the total number of
swimming pools built annually by Anthony & Sylvan to over 6,000.
With a national network of offices to serve
customers, we are able to support multiple markets with a high level of
pool-building activity. Additionally, we are well positioned to develop and
expand relationships with national and regional home builders. These
relationships help us become the pool installer of choice in many new housing
developments, where the cost of the pool installation can be included in the
homeowner's first mortgage.
Effective management, strategic marketing and efficient operations remain the
key drivers for our continued success. Radio, television and newspaper
advertisements in major U.S. metropolitan areas work in concert with superior
sales materials to promote swimming pool ownership to a vast number of leisure-
oriented Americans. Consequently, we have continued to refine our in-home,
interactive computer sales presentation. This computerized sales tool is
increasing the number of sales made while reducing the number of visits
required. All newly hired design consultants are immediately trained to use this
effective sales tool.
Customer service continues to be our area of greatest focus. Close working
relationships with suppliers has allowed us to improve quality and delivery
schedules, while controlling costs.
Our singular goal is to make the process leading up to the customer's first swim
as pleasant and easy as possible. As an example, many of our customers finance
their swimming pool purchase. Our on-line credit application developed with our
financial partner can be accessed through our Internet home page at
http://www.anthony-sylvan.com. This simple, easy to use, near instant response
system limits the anxiety, frustration and time it takes to finance a new
swimming pool versus the traditional visit to a financial institution.
With our size, experience, customer service focus and financial strength, we are
well poised to lead the consolidation of the highly fragmented pool building
industry and the outlook for profitable growth is bright.
[Picture]
[Picture]
[Picture]
8|9
<PAGE> 12
Essef Corporation and Subsidiaries
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended September 30,
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Net Sales $436,027 $306,061 $193,788 $149,255 $126,811
Income from Operations - Adjusted 33,857 26,019 16,592 10,777 10,947
Income from Operations 33,857 22,519 16,592 10,777 10,947
Net Income 16,578 11,766 9,326 7,511 6,995
Net Income - Adjusted 16,578 14,041 9,326 7,511 6,995
Per Diluted Share
Net Income 1.23 0.89 0.68 0.56 0.53
Net Income - Adjusted 1.23 1.06 0.68 0.56 0.53
Return on Shareholders' Equity 23.1% 20.3% 17.4% 16.8% 20.6%
- ---------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total Assets $266,923 $214,883 $111,248 $106,624 $ 74,171
Working Capital 33,345 14,148 15,201 18,725 18,212
Long-Term Debt 112,622 81,658 17,512 20,788 16,246
Total Debt 117,334 87,527 25,978 27,693 17,682
Shareholders' Equity 83,678 65,446 53,338 51,426 37,896
Debt to Total Capital 58.4% 57.2% 32.8% 35.0% 31.8%
- ---------------------------------------------------------------------------------------------------------------
OTHER DATA
Cash Flow from Operations $ 18,776 $ 33,077 $ 16,403 $ 11,287 $ 8,317
Capital Expenditures 15,407 16,058 6,580 8,387 4,906
Depreciation and Amortization 12,148 7,621 5,467 5,896 5,147
Engineering and Development 6,056 5,834 4,874 3,925 3,168
EBITDA 45,755 30,004 22,317 17,274 16,733
EBITDA - Adjusted 45,755 33,504 22,317 17,274 16,733
Average Shares Outstanding
Basic 11,721 11,645 11,623 12,554 11,783
Diluted 13,504 13,219 13,752 13,348 13,079
Market Price of Stock
High 23.00 16.14 7.64 7.64 7.54
Low 13.64 7.13 5.99 5.79 4.75
At September 30 17.50 15.68 7.23 7.23 5.89
Market Capitalization
at September 30 206,815 182,595 84,051 90,783 69,383
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
"Adjusted" amounts exclude $3,500,000 (or $2,275,000 after tax) in plant closing
costs incurred in 1997.
10|11
<PAGE> 13
Essef Corporation and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands
except per share data) 1998 1997 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $79,618 $40,209 $91,756 $55,599 $137,625 $102,652 $127,028 $107,601
Gross Profit 18,131 10,055 25,135 15,227 41,482 30,241 35,375 30,668
Income from Operations 1,734 1,639 5,241 5,044 16,395 11,495 10,487 4,341
Net Income 82 682 2,005 2,840 9,170 6,404 5,321 1,840
Net Income Per Share
Basic 0.01 0.06 0.17 0.24 0.78 0.55 0.45 0.16
Diluted 0.01 0.05 0.15 0.22 0.68 0.49 0.39 0.14
Market Price of Stock
High 16.14 7.65 20.00 9.89 23.00 11.14 22.50 16.14
Low 13.64 7.13 13.64 7.13 17.50 8.98 16.38 10.91
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The sum of the quarterly net income per diluted share in 1997 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>
<CAPTION>
COMPOUND ANNUAL GROWTH RATE 28.6%
<S> <C>
1994 $16,733
1995 $17,274
1996 $22,317
1997 $33,504
1998 $45,755
EBITDA - Adjusted in Thousands
</TABLE>
<TABLE>
<CAPTION>
COMPOUND ANNUAL GROWTH RATE 24.1%
<S> <C>
1994 $ 6,995
1995 $ 7,511
1996 $ 9,326
1997 $14,041
1998 $16,578
NET INCOME - Adjusted in Thousands
</TABLE>
<TABLE>
<CAPTION>
COMPOUND ANNUAL GROWTH RATE 24.6%
<S> <C>
1994 $23,472
1995 $29,926
1996 $45,395
1997 $50,795
1998 $56,598
INTERNATIONAL & EXPORT SALES - in Thousands
</TABLE>
<TABLE>
<S> <C>
1994 $ 4,906
1995 $ 8,387
1996 $ 6,580
1997 $16,058
1998 $15,407
CAPITAL EXPENDITURES - in Thousands
</TABLE>
<PAGE> 14
Essef Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
1998 COMPARED TO 1997
Net sales in 1998 of $436,027,000 increased 42.5% from 1997 net sales of
$306,061,000. Approximately 78% of this increase was attributable to the impact
of acquisitions in the Swimming Pool and Spa Equipment Segment and the Swimming
Pool Sales and Installation Segment. The remainder of the increase came from
internal growth. These segments benefited from the acquisition of General
Aquatics on May 1, 1997, and from the acquisition of several smaller businesses
during the fiscal year.
Sales growth in the Swimming Pool and Spa Equipment Segment was 44.3% for the
year. Approximately 76% of this increase was attributable to acquisitions, with
the remainder of this growth coming internally primarily due to favorable
weather and economic conditions in many of its domestic markets, creating a
stronger pool season than 1997. The Swimming Pool Sales and Installation Segment
also benefited from acquisitions and the favorable conditions in the pool
market, as sales doubled over those reported in the prior year. Approximately
76% of this increase is attributable to having this segment for a full twelve
months in the current year as it was acquired on May 1, 1997, and from current
year acquisitions. Sales growth of 4.1% in the Water Treatment and Systems
Equipment Segment was lower than expected due to the slowdown in Asia, declining
oil prices that have reduced capital spending, the worldwide oversupply of
computer chips which has slowed the demand for ultra-pure water systems in that
industry, and competitive pricing pressures in certain of its markets.
Gross profit increased by $33,932,000 in 1998 over 1997 while gross margins were
27.5% of sales versus 28.2% in 1997. The increase in gross profit came primarily
from the increase in sales. The slight gross margin decline resulted from
several factors. First, a full year's inclusion of the General Aquatics business
which had been acquired in May 1997, at the peak of their seasonal production.
Second, a higher cost structure in the Water Treatment and Systems Equipment
Segment that arose from increased capacity in the United States in anticipation
of increased demands which did not materialize and the start-up delay of the
Company's new India manufacturing facility until mid-year. Partially offsetting
these factors were slightly improved gross margins in the Swimming Pool and Spa
Equipment Segment arising from efficiencies gained from the facility
consolidation at the end of last year and from higher sales volume.
Operating expenses of $86,266,000 in 1998 increased by $22,594,000 over 1997,
and decreased as a percentage of sales from 20.8% to 19.8%. The increase in
expenses was primarily attributable to the increase in sales volumes and
specifically to the inclusion of the Swimming Pool Sales and Installation
Segment for a full year and its commission structure which is directly linked to
sales. The decrease in expenses as a percentage of sales was a combination of
several factors, which principally includes costs of $3,500,000 relating to a
plant closing in 1997 and the reduction of costs of $2,379,000 in 1998 compared
to 1997 relating to incentive based employee stock options and other similar
compensatory plans. Partially offsetting these reductions in operating expenses
were $995,000 of legal fees associated with certain acquisition-related
activities, $900,000 of non-recurring legal and settlement costs resulting from
the unfavorable resolution of a matter that arose a number of years ago, and a
$730,000 increase in goodwill amortization related to acquisitions.
Interest expense increased by $3,947,000 or 92.2% to $8,228,000. This increase
arose from the inclusion of a full year of interest expense for borrowings
associated with the acquisition of General Aquatics and additional amounts
borrowed to fund 1998 acquisitions.
The Company's effective tax rate was 34.7% in 1998 compared to 35.0% in 1997.
<PAGE> 15
Essef Corporation and Subsidiaries
The preceding items resulted in net income of $16,578,000, an increase of 40.9%
compared to $11,766,000 in 1997, and an increase in earnings per share of 38.2%
from $.89 in 1997 to $1.23 in 1998.
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 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 Segment sales
increased 30.3%. 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 sales by the Company`s foreign operations
and exports over the prior year despite an unfavorable foreign exchange rate
which reduced the increase by 7%.
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: costs of $3,500,000 relating to the closing of one of
Pac-Fab's plants; 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 30.9% 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.
Interest expense increased by $1,671,000 or 64% to $4,281,000. This was the
result of increased borrowings 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 30.9%
from $.68 in 1996 to $.89 in 1997.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, funded debt was $117,334,000, an increase of $29,807,000
from September 30, 1997. This increase came principally as a result of the
financing of acquisitions, the most significant of which was the $24,577,000
acquisition of Rainbow in July 1998. Funded debt represents 58.4% of funded debt
plus stockholders' equity at September 30, 1998, compared to 57.2% at September
30, 1997.
During 1998, cash flow provided from operating activities of $18,776,000
decreased from $33,077,000 reported in 1997. The acquisition of General Aquatics
in May 1997 was the principal reason for the decline in operating cash flow as
the company was acquired during its peak production and working capital season.
As such, for the five month period ended September 30, 1997, General Aquatics'
operations generated a
<PAGE> 16
Essef Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$7,561,000 reduction in working capital as they came down from their seasonal
peak. In addition to the General Aquatics impact in 1997, accounts receivable
and product inventories increased by $8,222,000 in 1998 due primarily to the
impact of higher sales and increases in inventory in India as that facility
became operational during the year. Partially offsetting these uses of cash from
operating activities was the $4,812,000 improvement in the Company's net income.
Capital expenditures in 1998 totaled $15,407,000 compared to $16,058,000 in 1997
and were funded by cash flows from operating activities and external borrowings.
In May 1998, the Company amended its existing unsecured multi-currency revolving
facility ("Credit Facility"). The amendment included an increase of $50,000,000
in the Credit Facility and a one-year extension of the loan maturity date to
April 30, 2003, which may be extended in one year increments with the approval
of the bank group. After the amendment, the total Credit Facility was
$185,000,000. The Credit Facility includes commitment reductions, but not below
$135,000,000, at specified dates and for events throughout the term of loan.
In October 1998, the Company entered into an interest rate swap arrangement with
one of the members of its bank group. The swap arrangement is for a $50,000,000
notional amount for a two-year term with a bank option for a third year and
fixes the Company's interest rate at 4.445% plus the applicable bank margin
based on the Company's leverage ratio.
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 and capital needs in fiscal 1999.
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. 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, management does not
expect these matters to have a material adverse effect on the consolidated
financial position or results of operations of the Company.
Year 2000 Matters
- -----------------
The Company utilizes computer technologies to varying degrees throughout its
three business segments to effectively carry out its day-to-day operations.
Computer technologies include both information technology in the form of
hardware and software, as well as embedded technology in the Company's
facilities and equipment. Similar to most companies, the Company must determine
whether its systems are capable of recognizing and processing date-sensitive
information properly as the year 2000 approaches.
During the past several years as a result of an operational decision to improve
its information systems, most of the significant business units within the Water
Treatment and Systems Equipment Segment and Swimming Pool and Spa Equipment
Segment have implemented enterprise-wide information systems. These information
systems are substantially year 2000 compliant, and therefore the costs to make
them fully compliant are not expected to be material. The Company is currently
in the process of assessing the information systems in the remaining business
units within these segments for year 2000 compliance. Business units whose
information systems are not year 2000 compliant will either implement the
Company's enterprise-wide information system or make modifications to existing
systems. In addition, these segments are in the process of evaluating the
computer
14|15
<PAGE> 17
Essef Corporation and Subsidiaries
controlled equipment and other systems utilized in the business that use
embedded processors that have the potential to be date sensitive to the year
2000 issue. Costs to replace or modify these information systems and processors
are not expected to exceed $1 million and will be completed by mid-1999. In
addition, the Swimming Pool Sales and Installation Segment in 1997, as part of
an overall modernization and upgrade of its information systems, began preparing
its computer systems and applications for the date change in the year 2000. To
date, this process has involved modifying or replacing certain hardware and
upgrading certain software and has not involved material costs to the Company.
The Company believes that substantially all of the necessary systems and
applications changes will be completed by mid-1999, and that the amount of
additional costs, if any, needed to address the year 2000 issue will be
immaterial. For all of the Company's business segments, the costs of the year
2000 issue are being funded through operating cash flow and are not material to
the Company. The Company`s segments have also not deferred any significant
information technology projects to address the year 2000 issue.
The Company currently believes it will be able to modify, replace or mitigate
its affected systems in time to avoid any material detrimental impact on its
operations. If the Company determines that it may be unable to modify and
properly test affected systems on a timely basis, the Company intends to develop
appropriate contingency plans for any such mission-critical systems at the time
such determination is made. While the Company is not presently aware of any
significant exposure that its systems will not be properly changed or modified
on a timely basis, there can be no assurances that all year 2000 correction
activities will be completed and properly tested before the year 2000, or that
contingency plans will sufficiently mitigate the risk of a year 2000 readiness
problem. An interruption of the Company's ability to conduct its business due to
a year 2000 issue could have a material adverse effect on the Company. The
Company is in the process of surveying suppliers and customers critical to its
business for the purpose of obtaining assurance regarding their ability to
properly operate their systems in the year 2000. The Company has targeted the
completion of these activities by mid-1999. The Company will develop appropriate
contingency plans in the event that a significant exposure is identified
relative to the dependencies on third-party systems. While the Company is not
presently aware of any such significant exposure, there can be no guarantee that
the systems of third-parties on which the Company relies will be converted in a
timely manner, or that a failure to properly convert by another company would
not have a material adverse effect on 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: the costs of integrating acquired businesses; product development
activities; dependence on existing management; global economic and market
conditions; the impact of weather on the pool businesses; and year 2000 issues.
<PAGE> 18
Essef Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $436,027 $306,061 $193,788
Cost of sales 315,904 219,870 142,551
- ------------------------------------------------------------------------------------------------------
Gross profit 120,123 86,191 51,237
Operating expenses
Engineering and development 6,056 5,834 4,874
Selling 45,201 29,804 13,890
Administrative 35,009 24,534 15,881
Plant closure costs -- 3,500 --
- ------------------------------------------------------------------------------------------------------
Total operating expenses 86,266 63,672 34,645
- ------------------------------------------------------------------------------------------------------
Income from operations 33,857 22,519 16,592
Interest expense 8,228 4,281 2,610
Other expense (income), net 250 136 (258)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 25,379 18,102 14,240
Provision for income taxes 8,801 6,336 4,984
- ------------------------------------------------------------------------------------------------------
Income from continuing operations 16,578 11,766 9,256
Income from discontinued operations -- -- 70
- ------------------------------------------------------------------------------------------------------
Net income $ 16,578 $ 11,766 $ 9,326
- ------------------------------------------------------------------------------------------------------
Per share information
Income from continuing operations
Basic $ 1.41 $ 1.01 $ .80
Diluted 1.23 .89 .68
- ------------------------------------------------------------------------------------------------------
Net income
Basic 1.41 1.01 .80
Diluted 1.23 .89 .68
- ------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
16|17
<PAGE> 19
Essef Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At September 30,
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 1,137 $ 1,668
Accounts receivable, less allowance for doubtful
accounts of $3,198 and $3,048, respectively 44,545 37,512
Inventories 50,163 34,597
Prepayments and other 3,069 2,173
- ------------------------------------------------------------------------------------------------------
Total current assets 98,914 75,950
Property, Plant and Equipment, at cost
Land 2,995 1,285
Buildings 32,658 25,389
Machinery and equipment 101,257 87,527
- ------------------------------------------------------------------------------------------------------
136,910 114,201
Less accumulated depreciation 57,834 50,381
- ------------------------------------------------------------------------------------------------------
Net property, plant and equipment 79,076 63,820
Other Assets
Goodwill, net 74,444 60,349
Deferred income taxes 4,391 5,706
- ------------------------------------------------------------------------------------------------------
Other 10,098 9,058
- ------------------------------------------------------------------------------------------------------
Total other assets 88,933 75,113
- ------------------------------------------------------------------------------------------------------
$266,923 $214,883
- ------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings $ 3,853 $ 5,320
Current maturities of long-term debt 859 549
Accounts payable 23,871 20,028
Accrued expenses 33,301 27,237
Accrued income taxes 3,685 8,668
- ------------------------------------------------------------------------------------------------------
Total current liabilities 65,569 61,802
Long-Term Debt 112,622 81,658
Other Long-Term Liabilities 5,054 5,977
Shareholders' Equity
Preferred shares no par value,
authorized 1,000,000 shares, none issued -- --
Common shares no par value, authorized 40,000,000 shares, issued
12,321,933 and 12,148,994 shares in 1998 and 1997, respectively 50,570 32,234
Treasury shares at cost, 503,927 shares in 1998 and 1997 (7,962) (7,962)
Retained earnings 40,888 41,099
Foreign currency translation adjustment 182 75
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 83,678 65,446
- ------------------------------------------------------------------------------------------------------
$266,923 $214,883
- ------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 20
Essef Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Cumulative
Common Retained Translation Treasury
(Dollars in thousands) Stock Earnings Adjustment Stock Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - September 30, 1995 $21,361 $29,012 $ 2,003 $ (950) $51,426
Net income -- 9,326 -- -- 9,326
Exercise of stock options
(42,203 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
(22,601 shares) 132 -- -- -- 132
10% stock dividend 9,005 (9,005) -- -- --
Executive 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
Net income -- 16,578 -- -- 16,578
Issuance of shares for
acquisitions (97,184 shares) 1,654 -- -- -- 1,654
Exercise of stock options
(75,755 shares) 456 -- -- -- 456
10% stock dividend 16,789 (16,789) -- -- --
Executive stock option accrual (838) -- -- -- (838)
Tax benefits from exercise
of stock options 275 -- -- -- 275
Foreign currency
translation adjustment -- -- 107 -- 107
- -------------------------------------------------------------------------------------------------------------------
Balance - September 30, 1998 $50,570 $40,888 $ 182 $(7,962) $83,678
- -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
18|19
<PAGE> 21
Essef Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 16,578 $ 11,766 $ 9,326
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 12,148 7,621 5,467
Deferred taxes 5,538 (2,149) 343
Other (958) 1,236 637
Changes in operating assets and liabilities
Accounts receivable (1,617) 9,107 (3,508)
Inventories (6,605) 423 (2,604)
Prepayments and other (2,334) (537) 613
Accounts payable 95 (6,587) 3,762
Accrued expenses 915 7,861 747
Accrued income taxes (4,984) 4,336 1,620
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,776 33,077 16,403
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property, plant and equipment (15,407) (16,058) (6,580)
Business acquisitions (37,602) (81,387) (936)
Proceeds from sale of business 4,308 5,071 --
Other, net (869) (857) (1,449)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (49,570) (93,231) (8,965)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from long-term debt 31,274 114,533 --
Repayments of long-term debt -- (54,173) (3,331)
(Decrease) increase in short-term borrowings (1,467) (1,290) 1,572
Treasury stock acquired -- -- (7,012)
Proceeds from exercise of stock options 456 132 83
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 30,263 59,202 (8,688)
- ----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (531) (952) (1,250)
Cash and Cash Equivalents
Beginning of year 1,668 2,620 3,870
- ----------------------------------------------------------------------------------------------------------------
End of year $ 1,137 $ 1,668 $ 2,620
- ----------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 8,026 $ 3,705 $ 2,450
Income taxes paid, net 8,299 4,165 3,080
Non Cash Financing and Investing Activities
Stock issued in acquisitions 1,654 -- --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 22
Essef Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Essef Corporation and subsidiaries (the "Company") operate in three segments and
specialize in products that are used to move, store, treat and enjoy water. The
Company's products are used in the residential, commercial, industrial and
municipal markets. The Swimming Pool and Spa Equipment Segment is a leading
supplier of equipment including filters, pumps, heaters, controls, valves,
lights, accessories, and tile. The Water Treatment and Systems Equipment Segment
provides fiberglass-reinforced pressure vessels and subsystems for water and
other liquids. The Swimming Pool Sales and Installation Segment is the largest
residential in-ground pool sales and installation business in the United States.
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 year
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. Assets, valued at cost, are generally being depreciated over
their useful lives as follows: buildings, 30 years; and machinery and equipment,
3 to 15 years.
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 40 years. Accumulated amortization at September 30, 1998 and 1997,
was $3,115,000 and $1,425,000, respectively. The Company continually evaluates
goodwill based on the present value of estimated future cash flows 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
Effective October 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). Prior period results have
been restated to reflect the adoption of SFAS 128. Basic earnings per share is
computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is based on the
combined weighted average number of common shares and common share equivalents
outstanding which include the assumed exercise or conversion of options. In
computing diluted earnings per share, the Company has utilized the treasury
stock method.
20|21
<PAGE> 23
Essef Corporation and Subsidiaries
The computation of weighted average common and common equivalent shares used in
the calculation of basic and diluted earnings per share is shown below:
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Numerator
Income from continuing
operations $16,578 $11,766 $ 9,256
- -------------------------------------------------------------
Net income available to
common shareholders $16,578 $11,766 $ 9,326
- -------------------------------------------------------------
Denominator
Weighted average common
shares outstanding 11,721 11,645 11,623
Dilutive effect of stock
options and awards 1,783 1,574 2,129
- -------------------------------------------------------------
Denominator for net income
per share, diluted 13,504 13,219 13,752
- -------------------------------------------------------------
Income per share from
continuing operations
Basic $ 1.41 $ 1.01 $ .80
Diluted 1.23 .89 .68
Net income per share
Basic 1.41 1.01 .80
Diluted 1.23 .89 .68
- -------------------------------------------------------------
</TABLE>
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 July 22, 1998, the Company acquired the net operating assets and real estate
of Rainbow Lifegard, Inc., Rainbow Molding, Inc., and Kencar, Inc., collectively
known as Rainbow for $24,577,000, 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. Rainbow designs and manufactures
accessory products for pools, spas and aquariums and has been integrated into
the Swimming Pool and Spa Equipment Segment.
On May 1, 1997, the Company acquired certain assets and assumed certain
liabilities of General Aquatics, Inc., for $76,898,000, including transaction
costs. The acquisition has been accounted for as a purchase and the results of
operations have been included in the Company's results since the date of
acquisition. 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.
<PAGE> 24
Essef Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS ACQUISITIONS (CONTINUED)
The cost in excess of the fair value of the net assets acquired for both of
these acquisitions and those discussed below are being amortized on a
straight-line basis over 40 years.
The following table is a summary of these transactions:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------
General
Rainbow Aquatics
- -----------------------------------------------------------
<S> <C> <C>
Fair value of identifiable
assets acquired $21,247 $66,262
Costs in excess of net
assets acquired 6,281 43,575
Less liabilities assumed (2,951) (32,939)
- -----------------------------------------------------------
Net cash paid for acquisition $24,577 $76,898
- -----------------------------------------------------------
</TABLE>
The following unaudited pro forma combined results of
operations give effect to the Rainbow acquisition as though it were completed at
the beginning of 1998 and the General Aquatics acquisition as though it had been
completed at the beginning of 1997. 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 acquisitions been made at the beginning of the
respective years, or of results which may occur in the future.
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
- -------------------------------------------------------------
Net Net Earnings
(Unaudited) Sales Income Per Share
- -------------------------------------------------------------
<S> <C> <C> <C>
1998 Pro forma
for Rainbow $459,318 $17,464 $1.29
1997 Pro forma
for General Aquatics 394,102 9,182 .70
- -------------------------------------------------------------
</TABLE>
Also in 1998 within the Swimming Pool and Spa Equipment Segment, the Company
acquired two swimming pool tile distribution businesses, Cozad & O'Hara, Inc.,
and Thompson Ceramic Tile. These acquisitions expanded the Company's tile
distribution capabilities to the Western United States and Florida. Additionally
in 1998, the Company acquired the net operating assets of Tango Pools, an
installer of swimming pools in Las Vegas, Nevada, and Pools by Andrews, Inc., an
installer of pools in Florida, into its Swimming Pool Sales and Installation
Segment. These four acquisitions were accounted for as purchases and the Company
paid as consideration for these businesses a total of $14,105,000 in a
combination of cash and Essef Corporation Common Stock. These transactions did
not have a significant impact on the Company's pro forma earnings.
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 did not have a
significant impact on pro forma earnings.
3. INITIAL PUBLIC OFFERING AND SPIN-OFF
In May 1998, the Company announced its intention to separate from the Company
its Swimming Pool Sales and Installation Segment ("Anthony & Sylvan") and the
associated assets and liabilities of such business. To accomplish the
separation, the Company plans to commence an initial public offering for 15 to
20 percent of Anthony & Sylvan's shares. The Company also plans to distribute
the remaining shares of Anthony & Sylvan to the Company's shareholders. Such
distribution is contingent, upon, among other things, the distribution
qualifying as a tax-free distribution for federal income tax purposes under
Section 355 of the Internal Revenue Code of 1986. The Company and Anthony &
Sylvan have entered, or will enter, into on or prior to the consummation of the
initial public offering, certain arrangements governing various interim and
ongoing relationships between the companies, including agreements that will
provide for administrative services, tax allocations, intercompany borrowings
and indemnification.
4. PLANT CLOSURE
In 1997, as a result of the acquisition of General Aquatics, the Company closed
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.
22|23
<PAGE> 25
Essef Corporation and Subsidiaries
The costs associated with the plant closure resulted in a charge of $3,500,000
($2,275,000 after tax, or $.17 per diluted share) in the fourth quarter of 1997.
5. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for 22% and 36% of inventories in 1998 and
1997, 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:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------
1998 1997
- -------------------------------------------------------------
<S> <C> <C>
FIFO cost
Raw materials $24,543 $17,482
Work-in-process 1,926 4,483
Finished goods 24,818 13,857
- -------------------------------------------------------------
51,287 35,822
Excess of FIFO over LIFO cost (1,124) (1,225)
- -------------------------------------------------------------
Net inventories $50,163 $34,597
- -------------------------------------------------------------
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Accrued compensation $12,769 $11,093
Customer advance payments 5,982 3,738
Other 14,550 12,406
- --------------------------------------------------------------
$33,301 $27,237
- --------------------------------------------------------------
</TABLE>
7. SHORT-TERM BORROWINGS
The Company's European subsidiaries have working capital lines of credit of
approximately $15,000,000. At September 30, 1998 and 1997, $1,595,000 and
$3,312,000, respectively, was outstanding under these lines of credit. At
September 30, 1998, interest was at rates ranging from 3.95% to 8.5%. In
addition, a note payable on demand of $2,258,000 and $2,008,000 relating to an
acquisition was outstanding at September 30, 1998 and 1997, respectively. The
interest rate on the note is 6%.
8. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------
1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Revolving credit facility $110,940 $79,700
Other loans 2,541 2,507
- -------------------------------------------------------------
113,481 82,207
Less current maturities (859) (549)
- -------------------------------------------------------------
$112,622 $81,658
- -------------------------------------------------------------
</TABLE>
In May 1998, the Company amended its existing unsecured multi-currency revolving
loan facility ("Credit Facility"), increasing it $50,000,000, bringing the total
facility to $185,000,000. The Credit Facility matures April 30, 2003, 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
$135,000,000. Interest rates are based on increments over the LIBOR or foreign
currency equivalent rate. A 25 basis point facility fee was payable on the total
amount of the commitment. As of September 30, 1998, interest rates ranged from
6.0% to 6.50%. The Company is in compliance with all of its covenants under its
credit facilities.
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 7.33% at September 30, 1998. The Company does not use derivatives for
trading purposes.
Aggregate maturities of long-term debt are the following: 1999, $859,000; 2000,
$438,000; 2001, $310,000; 2002, $184,000; 2003, $111,090,000; and $600,000
thereafter.
<PAGE> 26
Essef Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The provision for income taxes is calculated based upon the following components
of income before taxes:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Domestic $23,614 $16,750 $11,850
Foreign 1,765 1,352 2,390
- --------------------------------------------------------------
$25,379 $18,102 $14,240
- --------------------------------------------------------------
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $4,136 $7,149 $4,396
Foreign 210 432 (277)
State 434 959 546
- --------------------------------------------------------------
Total current 4,780 8,540 4,665
- --------------------------------------------------------------
Deferred
Federal 3,354 (1,860) 294
Foreign 606 (51) (25)
State 61 (293) 50
- --------------------------------------------------------------
Total deferred 4,021 (2,204) 319
- --------------------------------------------------------------
$8,801 $6,336 $4,984
- --------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows at September 30:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Nondeductible accruals $7,727 $8,697
Other 1,226 1,157
Deferred tax liabilities
Book basis of fixed assets
in excess of tax basis (3,866) (3,700)
Tax amortization of goodwill
in excess of book (691) (292)
Other (5) (156)
- --------------------------------------------------------------
Net deferred tax asset $4,391 $5,706
- --------------------------------------------------------------
</TABLE>
The consolidated tax provision differs from the tax provision computed at the
statutory United States tax rate of 35% for 1998 and 1997 and 34% for 1996 for
the following reasons:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at statutory
Federal rate $8,883 $6,336 $4,842
State income taxes 322 433 557
Foreign tax differential 198 (92) (597)
Other items, net (602) (341) 182
- --------------------------------------------------------------
$8,801 $6,336 $4,984
- --------------------------------------------------------------
</TABLE>
10. LEASES
The Company leases certain of its facilities and equipment. Total rental
expenses were $5,879,000, $3,100,000, and $1,521,000 in 1998, 1997 and 1996,
respectively. Minimum annual rental commitments for the next five years under
non-cancelable operating leases are the following: 1999, $5,712,000; 2000,
$4,790,000; 2001, $3,556,000; 2002, $2,236,000; 2003, $1,636,000; and $1,321,000
thereafter.
11. 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 $2,498,000, $2,066,000 and $1,514,000
in 1998, 1997 and 1996, respectively.
24|25
<PAGE> 27
Essef Corporation and Subsidiaries
12. CAPITAL STOCK AND STOCK OPTION PLAN
On January 29, 1998, the Board of Directors authorized a 10% stock dividend to
be distributed on March 3, 1998, to shareholders of record on February 12, 1998.
On February 28, 1997, the Company distributed a 10% stock dividend to
shareholders of record on February 7, 1997. On September 9, 1997, the Company
distributed a 2-for-1 stock split to shareholders of record on August 22, 1997.
The consolidated financial statements have been retroactively restated to
reflect the number of shares outstanding following the aforementioned dividends
and split.
The Company has a stock option plan for employees granting ten year options for
the purchase of up to 1,210,000 common shares of the Company. Options vest over
periods ranging from three to five years from the date of grant. The outstanding
options expire at various dates through the year 2007. Activity in the stock
option plan is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Number Price
of Options per Share
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding September 30, 1995 577,886 $1.39--$ 6.82
Granted 196,187 $ 7.23
Cancelled or expired (3,047) $ 6.82
Exercised (42,202) $1.39--$ 3.51
- ---------------------------------------------------------------
Outstanding September 30, 1996 728,824 $1.39--$ 7.23
Granted 22,000 $ 14.16
Cancelled or expired (8,531) $1.39--$ 7.23
Exercised (22,601) $1.39--$ 7.23
- ---------------------------------------------------------------
Outstanding September 30, 1997 719,692 $1.39--$14.16
Granted -- --
Cancelled or expired (57,571) $6.74--$ 6.82
Exercised (75,755) $1.39--$ 7.23
- ---------------------------------------------------------------
Outstanding September 30, 1998 586,366 $1.39--$14.16
- ---------------------------------------------------------------
Exercisable September 30, 1998 470,936
- ---------------------------------------------------------------
</TABLE>
At September 30, 1998, the weighted average exercise price and weighted average
remaining contractual life for outstanding options described above were $6.47
per share and 4.3 years, respectively.
In addition to the options shown above, in 1990 the Company granted options to
the Chief Executive Officer to purchase on a stock split and dividend adjusted
basis, 2,351,756 common shares at $.83 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 1995 and 1996, the Company granted
certain officers options to purchase 60,500 and 181,500 common shares,
respectively, which expire ten years from the date of grant. The vesting of
these options was based on attainment of specified results and periods of
service. In 1998 the performance criteria on these options was achieved. Given
this achievement, $1,148,000 of the remaining compensation expense related to
these options will be amortized in future periods based on the remaining vesting
schedule for the options related to these officers. Also, in 1998 the Company
cancelled 363,000 options which had previously been granted to another officer
of the Company, following the resignation of that officer. The results of
operations in 1998 include a net reduction of $838,000 of compensation expense
related to the options of these three officers compared to expense provided in
1997 of $1,653,000.
The following table summarizes information about the Company's performance based
stock options outstanding at September 30, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Number Number Remaining Exercise
Price Granted Exercisable Life Price
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
$0.83 2,351,756 2,351,756 2.0 $0.83
6.75 60,500 -- 6.4 6.75
7.23 181,500 -- 8.0 7.23
- -------------------------------------------------------------
2,593,756 2,351,756 2.5 $1.42
- -------------------------------------------------------------
</TABLE>
<PAGE> 28
Essef Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three business segments: Swimming Pool and Spa
Equipment; Water Treatment and Systems Equipment; and Swimming Pool Sales and
Installation. The Swimming Pool and Spa Equipment Segment supplies pumps,
filters, heaters, controls, valves, lights, accessories, and tile for swimming
pools and spas. The Water Treatment and Systems Equipment Segment manufactures
products for moving, storing and treating water in residential, commercial,
industrial, and municipal water supply systems. Geographically, the
manufacturing operations of the two previously described segments are located in
the United States, Europe, and India. The Swimming Pool Sales and Installation
Segment installs residential in-ground concrete swimming pools throughout the
United States.
The following table contains a summary of information of each industry segment:
<TABLE>
<CAPTION>
BY INDUSTRY SEGMENT
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Net Income from Total Capital Depreciation
Sales Operations Assets Expenditures & Amortization
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Swimming Pool and
Spa Equipment
1998 $193,950 $21,642 $128,042 $ 5,897 $ 5,283
1997 134,430 12,267 93,721 3,536 2,831
1996 103,201 9,273 44,318 2,080 1,925
- ------------------------------------------------------------------------------------------------------------------------------
Water Treatment and
Systems Equipment
1998 103,576 7,966 69,920 7,271 4,771
1997 99,513 10,003 63,413 11,725 4,057
1996 90,587 10,222 60,377 4,458 3,513
- ------------------------------------------------------------------------------------------------------------------------------
Swimming Pool Sales
and Installation
1998 148,116 7,728 53,972 2,091 2,032
1997 74,205 8,143 43,939 760 702
1996 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Corporate
1998 -- (3,479) 14,989 148 62
1997 -- (4,394) 13,810 37 31
1996 -- (2,903) 6,553 42 29
- ------------------------------------------------------------------------------------------------------------------------------
Intersegment
1998 (9,615) -- -- -- --
1997 (2,087) -- -- -- --
1996 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated
1998 436,027 33,857 266,923 15,407 12,148
1997 306,061 26,019 214,883 16,058 7,621
1996 193,788 16,592 111,248 6,580 5,467
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1997 operating income excludes a $3,500,000 charge related to a plant
closure.
26|27
<PAGE> 29
Essef Corporation and Subsidiaries
Export sales from the Company's United States operations were approximately
$15,168,000, $19,085,000 and $16,133,000 for the years ended September 30, 1998,
1997 and 1996, respectively.
The following table contains a summary of information by geographic area:
<TABLE>
<CAPTION>
BY GEOGRAPHIC AREA
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Net Income from Total Capital Depreciation
Sales Operations Assets Expenditures & Amortization
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States
1998 $394,597 $34,653 $219,684 $11,942 $10,961
1997 274,351 28,697 176,658 11,920 6,554
1996 164,526 17,244 84,244 5,468 4,228
- -------------------------------------------------------------------------------------------------------------------------------
Foreign
1998 41,430 2,683 32,250 3,317 1,125
1997 31,710 1,716 24,415 4,101 1,036
1996 29,262 2,251 20,451 1,070 1,210
- -------------------------------------------------------------------------------------------------------------------------------
Corporate
1998 -- (3,479) 14,989 148 62
1997 -- (4,394) 13,810 37 31
1996 -- (2,903) 6,553 42 29
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated
1998 436,027 33,857 266,923 15,407 12,148
1997 306,061 26,019 214,883 16,058 7,621
1996 193,788 16,592 111,248 6,580 5,467
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1997 operating income excludes a $3,500,000 charge related to a plant
closure.
<PAGE> 30
Essef Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $49,588,000 and
$32,420,000 in 1998 and 1997, respectively. At September 30, 1998, 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. BUSINESS DISPOSITIONS
On July 8, 1998, the Company completed the sale of
substantially all of the assets of its subsidiary Enpac Corporation for
$3,500,000, subject to adjustment, to a corporation controlled by the co-trustee
of trusts that beneficially own approximately 6% of the Company's common shares.
The results of operations have been included in the Company's results up to the
date of sale and no material gain or loss was recognized on the sale
transaction.
The Company divested 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. 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 in the class action
and other actions 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.
The Company and other defendants recently entered into an agreement to settle
the class action portion of the aforementioned litigation. In November 1998, the
court issued an order which preliminarily approved the settlement, representing
in excess of $100 million of claims, subject to a final hearing in February
1999. The Company's portion of this settlement, which is not material, is
covered by insurance.
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.
28|29
<PAGE> 31
Essef Corporation and Subsidiaries
17. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("Board") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). 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 No. 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.
In June 1998, the Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. The Company is required to adopt SFAS 133 in fiscal 2000. The Company is
currently evaluating the requirements of SFAS 133 but, based on its limited use
of derivative financial instruments, does not expect it to have a material
effect on the Company.
<PAGE> 32
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
Thomas B. Waldin
President and Chief Executive Officer
/s/ Stuart D. Neidus
Stuart D. Neidus
Executive Vice President
and Chief Financial Officer
30|31
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Essef Corporation
We have audited the accompanying consolidated balance sheets of Essef
Corporation and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended September 30, 1998. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Essef Corporation and subsidiaries
as of September 30, 1998 and 1997 and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
November 13, 1998
<PAGE> 34
BUSINESS PROFILES
SWIMMING POOL AND SPA EQUIPMENT
PAC-FAB, RAINBOW LIFEGARD, COMPOOL,
NATIONAL POOL TILE, PARAGON AQUATICS
LOCATIONS: Sanford, NC; Moorpark, CA; El Monte, CA;
Mountain View, CA; Anaheim, CA;
LaGrangeville, NY.
GEOGRAPHIC
PENETRATION: Worldwide
MARKETS: Residential and Commercial
PRODUCTS: Swimming pool components including high pressure/ high flow pumps,
sand filters, cartridge filters, diatemaceous earth filters,
heaters, computer- automated control systems and valves, drains,
fittings, underwater lights, skimmers, accessories and tile;
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, and ladders.
BRAND NAMES: Compool, 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), AquaNeon(TM),
Hi-Lite(TM), Spa Brite(TM), FIBERworks(TM), Bermuda(TM), Luxury
Jets(TM), Vac-Mate(R), Hydro-Skim(R), Leaf Eater(R), Posi-Clor(R),
Lifegard(R), Rainbow Lifegard(R), Pro-Vac(R), Concorde(TM),
Mini-Vac(TM), Uni-Vac(TM); Paraflyte, Quickset, Competitor,
Varsity, Sturdee, Rover, Lookout, and Stark Aquatics.
APPLICATIONS: Residential and commercial swimming pools and spas; Water parks
and aquariums.
WATER TREATMENT AND SYSTEMS EQUIPMENT
STRUCTURAL, WELLMATE, CODELINE, EUROIMPEX
LOCATIONS: Chardon, OH; Herentals, Belgium; Escondido, CA; Goa, India;
Milan, Italy; Ontario, CA; Taipei, Taiwan; Shanghai, China.
GEOGRAPHIC
PENETRATION: Worldwide
PRODUCTS: Composite and fiberglass pressure vessels, 6" to 96" diameter,
membrane housings for high and low pressure filtration and cross
flow separation processes. ASME code pressure vessels,
hydropneumatic pressure boost and well system tanks.
BRAND NAMES: Codeline(TM), Polyglass, Bajonet, ROmate(TM), CompTec(TM),
WellMate(TM), Universal(TM), MiniMate(TM), and Low-Profile(TM).
APPLICATIONS: Reverse osmosis, ultrafiltration and microfiltration of water and
other liquid streams; Filtration, ion exchange, hot water and
other liquid processing and chemical storage; Water processing and
treatment; Water well and pressure boosting systems.
SWIMMING POOL SALES AND INSTALLATION
ANTHONY & SYLVAN
HEADQUARTERS: Doylestown, PA.
GEOGRAPHIC
PENETRATION: United States
Markets: Southern Connecticut/West Chester County, NY; Newark/North Jersey;
Freehold/Jersey Shore; Cherry Hill/South Jersey;
Philadelphia/Eastern Pennsylvania; Allentown/ Bethleham/ Easton,
PA; Willmington, DE; Washington-Baltimore; Northern Virginia;
Charlotte, NC; Atlanta, GA; Jacksonville, Orlando, Daytona Beach,
Palm Beach, Ft. Lauderdale, Miami, Ft. Myers, Tampa, FL; Dallas,
Houston, TX; Las Vegas, NV; Los Angeles/Orange County, South
Bay/San Jose, CA.
Products: Sales and installation of new residential in-ground concrete
swimming pools and spas; Renovation of existing pools and spas;
Pool supplies.
32|33
<PAGE> 35
DIRECTORS
Ralph T. King (1,2,3)
Chairman of the Board
Essef Corporation
James M. Biggar (2,3)
President and Chief Executive Officer
Glencairn Corporation
Gordon D. Harnett (1,3,4)
Chairman, President and
Chief Executive Officer
Brush Wellman, Inc.
George M. Humphrey, II (2,3,4)
President and Principal
Extrudex, LP
Mary Ann Jorgenson, Esq. (4)
Partner
Squire, Sanders & Dempsey LLP
Thomas B. Waldin (1)
President and Chief Executive Officer
Essef Corporation
Committees of the Board: 1. Executive Committee 2. Audit Committee 3.
Compensation Committee 4. Committee on Directors
CORPORATE OFFICERS
Thomas B. Waldin
President and
Chief Executive Officer
Douglas J. Brittelle
Executive Vice President
Gerald C. Hornick
Executive Vice President
Stuart D. Neidus
Executive Vice President and
Chief Financial Officer
Mark E. Brody
Vice President - Finance
Mary Ann Jorgenson, Esq.
Secretary
Kevan K. Langner
Assistant Secretary and
General Counsel
SUBSIDIARIES AND MAJOR FACILITIES
Pac-Fab, East
1620 Hawkins Avenue
Sanford, NC 27330
Phone: 919-774-4151
Internet: www.purextriton.com
Pac-Fab, West
10951 West Los Angeles Avenue
Moorpark, CA 93021
Phone: 805-523-2400
Internet: www.purextriton.com
Rainbow Lifegard
11204 Asher Street
El Monte, CA 91731
Phone: 626-443-6114
Compool Corporation
599 Fairchild Drive
Mountain View, CA 94043
Phone: 415-964-2201
Internet: www.compool.com
National Pool Tile Group
2840 Mira Loma Avenue
Anaheim, CA 92806
Phone: 714-630-2216
Paragon Aquatics
341 Route 55, West Wing
LaGrangeville, NY 12540
Phone: 914-452-5500
Structural North America
Pressure Vessel Division
Industrial Parkway
Chardon, OH 44024
Phone: 440-286-4116
Internet: www.structural.com
WellMate Division
Industrial Parkway
Chardon, OH 44024
Phone: 440-286-4116
Codeline Division
2181 Meyers Avenue
Escondido, CA 92029
Phone: 760-738-3000
Structural Europe N.V.
Industriepark Wolfstee
B-2200 Herentals, Belgium
Phone: 011-32-14-25.99.11
Structural India Private Ltd
Verne Industrial Park, Phase II
Goa, India 403722
Phone: 011-91-83-478-3132
Euroimpex S.p.A.
Via Reiss Romoli, 4
20019 - Settimo Milanese
Milan, Italy
Phone: 011-392-33.50.12.13
Structural Asia/Pacific
Taipei Office
28F, No. 285, Sec. 2
Wen Hua Road
Panchiao City, Taipei County
Taiwan, R.O.C.
Phone: 011-886-2-2253-1721
Shanghai Office
101, No.1800, Zhong Shan
West Road
Zao Fong Universe Building
Shanghai 200233
P.R. CHINA
Phone: 011-86-21-6440-0447
Anthony & Sylvan Pools Corporation
3739 Easton Road, Route 611
Doylestown, PA 18901
Phone: 215-489-5600
Internet: www.anthony-sylvan.com
GENERAL INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders of
Essef Corporation will be held at the
Corporate offices in Chardon, Ohio, on
February 4, 1999 at 10:00 a.m.
TRANSFER AGENT AND REGISTRAR
National City Bank, Corporate Trust
Administration, P.O. Box 94915
Cleveland, OH 44101-4915
800-622-6757
FORM 10-K
Copies of the Company's Annual Report on
Form 10-K as filed with the Securities and
Exchange Commission will be provided
upon written request to:
Mark E. Brody
Vice President - Finance
Essef Corporation
220 Park Drive
Chardon, Ohio 44024
STOCK EXCHANGE LISTING
Essef Corporation Common Shares are
listed in the NASDAQ Stock Market under
the symbol ESSF.
<PAGE> 36
ESSEF
CORPORATE OFFICES
220 Park Drive
Chardon, Ohio 44024
(440) 286-2200
www.essef.com
<PAGE> 1
Exhibit 21
----------
SUBSIDIARIES OF THE REGISTRANT
State or other
jurisdiction of
incorporation
Subsidiary or organization
- ---------- ---------------
Advanced Structures, Inc. Ohio
Anthony & Sylvan Pools Corporation Ohio
Compool, Inc. Ohio
CO Acquisition Corporation Ohio
ENPAC Corporation Delaware
EPPS, Ltd. Mauritius
Essef Manufacturing FSC, Inc. U.S. Virgin Islands
Euroimpex S.p.A. Italy
General Aquatics Corporation Ohio
National Pool Tile Group California
Pac-Fab, Inc. Delaware
Purex Pool Systems, Inc. Delaware
Rainbow Acquisition Corporation Ohio
Sanford Technology Corporation North Carolina
Structural Europe N.V. Belgium
Structural India Private, Ltd. India
Structural Australia Corporation Ohio
<PAGE> 1
Exhibit 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-17758 of Essef Corporation on Form S-8 of our report dated November 13, 1998,
appearing in this Annual Report on Form 10-K of Essef Corporation for the year
ended September 30, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Chardon, Ohio
December 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,137
<SECURITIES> 0
<RECEIVABLES> 47,743
<ALLOWANCES> (3,198)
<INVENTORY> 50,163
<CURRENT-ASSETS> 98,914
<PP&E> 136,910
<DEPRECIATION> (57,834)
<TOTAL-ASSETS> 266,923
<CURRENT-LIABILITIES> 65,569
<BONDS> 0
0
0
<COMMON> 50,570
<OTHER-SE> 33,108
<TOTAL-LIABILITY-AND-EQUITY> 266,923
<SALES> 436,027
<TOTAL-REVENUES> 436,027
<CGS> 315,904
<TOTAL-COSTS> 402,170
<OTHER-EXPENSES> 250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,228
<INCOME-PRETAX> 25,379
<INCOME-TAX> 8,801
<INCOME-CONTINUING> 16,578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,578
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.23
</TABLE>
