<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NO.: 0-26640
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SCP POOL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3943363
--------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
109 Northpark Boulevard, Covington, Louisiana 70433-5001
- -------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
504-892-5521
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(Registrant's telephone number, including area code)
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(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
At November 16, 1998, there were 11,639,434 outstanding shares of the
Registrant's Common Stock, $.001 par value per share.
<PAGE>
SCP POOL CORPORATION
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1998
(Unaudited) and December 31, 1997.................. 1
Consolidated Statements of Operations (Unaudited) --
Three Months Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997...... 2
Consolidated Statements of Cash Flows (Unaudited) --
Nine Months Ended September 30, 1998 and 1997...... 3
Notes to Consolidated Financial Statements
(Unaudited) -- September 30, 1998.................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 6
Part II. Other Information
Items 1.- 6.................................................. 16
<PAGE>
SCP POOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,464 $ 22,296
Receivables 53,148 24,775
Inventory, primarily goods purchased for resale 63,562 48,261
Prepaid expenses 981 562
Deferred income taxes 2,063 580
----------------------------------
Total current assets 125,218 96,474
Property and equipment, net 5,563 4,792
Goodwill, net 44,150 32,614
Other assets, net 2,443 2,572
----------------------------------
Total assets $177,374 $136,452
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,650 $ 20,266
Accrued and other current liabilities 16,751 6,078
Current portion of long-term debt 4,750 6,743
----------------------------------
Total current liabilities 47,151 33,087
Deferred income taxes 3,806 3,584
Long-term debt, less current portion 42,746 33,146
Stockholders' equity:
Preferred stock, $.01 par value; 100,000 shares --- ---
authorized
Common stock, $.001 par value; 20,000,000 shares
authorized; 11,630,434 and 11,610,071 shares issued
and outstanding in 1998 and 1997, respectively 12 12
Additional paid-in capital 52,471 52,348
Retained earnings 31,188 14,275
----------------------------------
Total stockholders' equity 83,671 66,635
----------------------------------
Total liabilities and stockholders' equity $177,374 $136,452
==================================
</TABLE>
Note: The balance sheet at December 31, 1997 has
been derived from the audited financial
statements at that date but does not include
all of the information and footnotes required
by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
1
<PAGE>
SCP POOL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $133,883 $98,492 $386,321 $286,847
Cost of sales 103,832 77,032 298,508 223,268
-----------------------------------------------------------
Gross profit 30,051 21,460 87,813 63,579
Warehouse expense 5,681 3,689 15,811 11,067
Selling and administrative expenses 14,074 10,702 41,798 33,416
Goodwill amortization 279 222 789 648
-----------------------------------------------------------
Operating income 10,017 6,847 29,415 18,448
Other income (expense):
Interest expense (1,012) (1,318) (2,872) (3,605)
Amortization expense (212) (179) (635) (534)
Miscellaneous income 339 249 769 629
-----------------------------------------------------------
(885) (1,248) (2,738) (3,510)
-----------------------------------------------------------
Income before income taxes 9,132 5,599 26,677 14,938
Provision for income taxes 3,312 2,128 9,804 5,676
-----------------------------------------------------------
Net income $ 5,820 $ 3,471 $ 16,873 $ 9,262
===========================================================
Net income per share of common stock:
Basic $.50 $.36 $1.45 $.96
===========================================================
Diluted $.49 $.35 $1.42 $.94
===========================================================
Average shares outstanding:
Basic 11,630 9,581 11,622 9,628
===========================================================
Diluted 11,911 9,812 11,912 9,883
===========================================================
</TABLE>
See accompanying notes.
2
<PAGE>
SCP POOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- --------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,873 $ 9,262
Adjustments to reconcile net income to net cash
provided by (used in) operating activities (11,201) (10,978)
------------------------
Net cash provided by (used in) operating activities 5,672 (1,716)
INVESTING ACTIVITIES
Acquisition of businesses (29,595) -
Purchase of property and equipment (1,476) (732)
Proceeds from sale of property and equipment 862 72
------------------------
Net cash used in investing activities (30,209) (660)
FINANCING ACTIVITIES
Net borrowings on revolving loan 13,350 13,500
Payments on long-term debt (5,743) (13,909)
Issuance of common stock 98 92
------------------------
Net cash provided by (used in) financing activities 7,705 (317)
------------------------
Change in cash and cash equivalents (16,832) (2,693)
Cash and cash equivalents at beginning of period 22,296 4,621
------------------------
Cash and cash equivalents at end of period $ 5,464 $ 1,928
========================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,779 $ 3,450
========================
Income taxes $ 3,926 $ 4,027
========================
</TABLE>
See accompanying notes.
3
<PAGE>
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
SEPTEMBER 30, 1998
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of
management, the accompanying unaudited interim financial statements reflect all
adjustments, of a normal recurring nature, necessary for a fair presentation of
the results of the interim periods.
The Company's business is highly seasonal. In general, sales and net income are
highest during the second and third quarters, which represent the peak months of
swimming pool use and installation. Operating results for the three month or
nine month periods ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. For
further information, refer to the consolidated financial statements for the year
ended December 31, 1997 and footnotes thereto included in the annual report on
Form 10-K filed by the Company with the Securities and Exchange Commission.
2. DESCRIPTION OF BUSINESS
As of September 30, 1998, SCP Pool Corporation and its wholly owned subsidiaries
(collectively referred to as the Company) maintain 89 service centers in 32
states located throughout the United States and one service center in England
from which they sell swimming pool equipment and supplies to pool builders,
retail stores, and service firms.
In January 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Bicknell Huston Distributors, Inc. ("BHD"), which
distributed swimming pool supplies and related products through its eleven
service centers in six northeastern states, for a purchase price of
approximately $23 million, which was paid in cash. This acquisition was
accounted for using the purchase method of accounting.
In August 1998, the Company acquired for cash the capital stock of Nor-Cal Ltd.,
which distributes swimming pool supplies through its service center in Crawley,
England. This acquisition was accounted for using the purchase method of
accounting.
4
<PAGE>
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
3. EARNINGS PER SHARE
On June 29, 1998, the board of directors declared a 3-for-2 stock split of the
Company's common stock, which was paid in the form of a stock dividend on July
24, 1998 to the stockholders of record at the close of business on July 13,
1998. Accordingly, all shares and per-share data for all periods presented
reflect the effects of this split. The par value for the additional shares
issued was transferred from additional paid-in capital to common stock.
4. RECENTLY ISSUED AUTHORITATIVE PRONOUNCEMENT
In April 1998 the AICPA's Accounting Standards Executive Committee issued SOP
98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires entities
to charge to expense start-up costs, including organizational costs, as
incurred. In addition, the SOP requires entities, upon adoption, to write-off as
the cumulative effect of a change in accounting principles, any previously
capitalized start-up or organization costs. The SOP is effective for most
entities for fiscal years beginning after December 15, 1998. At September 30,
1998, the company had unamortized organizational costs of approximately
$900,000.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was formed in December 1993 to acquire substantially all of the
assets and assume certain liabilities of South Central Pool Supply, Inc.
("Predecessor"). From its inception in 1980 through the end of 1993, the
Predecessor increased its sales by opening new service center locations and by
increasing sales to new and existing customers. Since the Company's acquisition
of the Predecessor in December 1993 (the "SCP Acquisition"), the Company has
grown through acquisitions, by opening new service centers and by increasing
sales to new and existing customers. From January 1990 to September 1998, the
Company expanded from 8 service centers in 6 states to 90 service centers in 32
states throughout the United States and in England, primarily through
acquisitions. In January 1998, the Company acquired substantially all of the
assets and assumed certain liabilities of Bicknell Huston Distributors ("BHD"),
a distributor of swimming pool supplies and related products through its eleven
service centers in six northeastern states, for a purchase price of
approximately $23 million (the "Bicknell Acquisition"). In August 1998, the
Company acquired the capital stock of Nor-Cal Ltd., which distributes swimming
pool supplies in England through its service center in Crawley, England.
The Company derives its revenues primarily from the sale of swimming pool
supplies and related products, including chemicals, cleaners, packaged pools and
liners, filters, heaters, pumps, lights, repair parts and other equipment
required to build, maintain, install and overhaul residential and small
commercial swimming pools. The Company sells its products primarily to swimming
pool remodelers and builders, independent swimming pool retailers and swimming
pool repair and service companies. These customers tend to be small, family
owned businesses with relatively limited capital resources. The Company
maintains a strict credit policy. Losses from customer receivables have
historically been within management's expectations.
The swimming pool supply industry is affected by various factors, including
general economic conditions, consumer saving and discretionary spending levels,
the level of new housing construction, weather and consumer attitudes towards
pool products for environmental or safety reasons. Although management believes
that the Company's geographic diversity could mitigate the effect of a regional
economic downturn and that the continuing maintenance and repair needs for
existing swimming pools could mitigate the effect of a general economic
downturn, there can be no assurance that the Company's results of operations and
expansion plans would not be materially adversely affected by any of such
downturns.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL (CONTINUED)
The principal components of the Company's expenses include the cost of products
purchased from manufacturers and sold during the year and operating expenses,
which are primarily related to labor, occupancy, commissions and marketing. Some
geographic markets serviced by the Company, particularly California, Arizona,
Texas and Florida, tend to be more competitive than others. In response to
competitive pressures from any of its current or future competitors, the Company
may be required to lower selling prices in order to maintain or increase market
share, and such measures could adversely affect the Company's gross margins and
operating results.
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, information derived from
the consolidated statements of operations of the Company expressed as a
percentage of net sales for such period.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.6 78.2 77.3 77.8
---------------------------------------------------------
Gross profit 22.4 21.8 22.7 22.2
Warehouse expense 4.2 3.7 4.1 3.9
Selling and administrative expenses 10.5 10.9 10.8 11.7
Goodwill amortization .2 .2 .2 .2
---------------------------------------------------------
Operating income 7.5 7.0 7.6 6.4
Other income (expense):
Interest expense (.8) (1.3) (.7) (1.2)
Amortization expense (.2) (.2) (.2) (.2)
Miscellaneous .3 .2 .2 .2
---------------------------------------------------------
Income before income taxes 6.8 5.7 6.9 5.2
Income taxes 2.5 2.2 2.5 2.0
---------------------------------------------------------
Net income 4.3% 3.5% 4.4% 3.2%
=========================================================
</TABLE>
The following discussions compare the results of operations of the Company for
the three month and nine month periods ended September 30, 1998 and 1997.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Net sales increased by $35.4 million, or 35.9%, to $133.9 million for the three
months ended September 30, 1998 from $98.5 million in the comparable 1997
period. Service centers acquired in the BHD acquisition in January 1998
contributed $19.3 million, while an increase of approximately 13.2% in net sales
at service centers open at least 15 months contributed $12.8 million to the
increase. The balance of the increase was attributable to sales at service
centers opened or acquired within the last 15 months (other than BHD).
Gross profit increased by $8.6 million, or 40.0%, to $30.1 million for the three
months ended September 30, 1998 from $21.5 million in the comparable 1997
period. Gross profit as a percentage of net sales increased 0.6% to 22.4% in the
1998 period from 21.8% in the 1997 period, due primarily to margins which
approximated 24.0% for the three months ended September 30, 1998 at service
centers acquired in the BHD acquisition and also due to improved margins in
California and Florida compared to the same period in the previous year.
Operating expenses increased by $5.4 million, or 37.1%, to $20.0 million for the
three months ended September 30, 1998 from $14.6 million in the comparable 1997
period. $3.2 million of this increase is due to operating expenses incurred at
service centers acquired in the BHD acquisition. The remaining increase is due
to additional salaries, occupancy expense and other costs associated with new
and acquired service centers (other than BHD) and, to a lesser extent, payroll
and other operating costs required to support the increased sales volume at
existing service centers. Operating expenses as a percentage of net sales
remained relatively constant at 14.9% in the 1998 period compared to 14.8% the
1997 period.
Interest and other expenses decreased $0.3 million to $0.9 million for the three
months ended September 30, 1998 from $1.2 million in the comparable 1997 period.
The decrease was primarily attributable to lower interest expense resulting from
lower average outstanding debt levels between periods and a more favorable
interest rate under the Third Amended and Restated Credit Agreement, dated as of
December 31, 1997, as amended from time to time, by and among South Central Pool
Supply, Inc., Lasalle National Bank, as agent, and various lenders from time to
time party thereto (the "Senior Loan Facility").
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Income taxes increased $1.2 million or 57.1% to $3.3 million for the three
months ended September 30, 1998 from $2.1 million for the three months ended
September 30, 1997. As a result of certain changes in Company organization, the
Company's effective income tax rate decreased to 36.0% for the three months
ended September 30, 1998 compared to 38.0% for the three months ended September
30, 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Net sales increased by $99.5 million, or 34.7%, to $386.3 million for the nine
months ended September 30, 1998 from $286.8 million in the comparable 1997
period. Service centers acquired in the BHD acquisition contributed $56.9
million, while an increase of approximately 11.4% in net sales at service
centers open at least 15 months contributed $31.7 million to the increase. The
balance of the increase was attributable to sales at service centers opened or
acquired within the last 15 months (other than BHD).
Gross profit increased by $24.2 million, or 38.1%, to $87.8 million for the nine
months ended September 30, 1998 from $63.6 million in the comparable 1997
period. Gross profit as a percentage of net sales increased 0.5% to 22.7% for
the 1998 period compared to 22.2% in the 1997 period. This increase was due
primarily to margins realized at service centers acquired in the BHD
acquisition, which approximated 24.0% for the nine months ended September 30,
1998, and to a lesser extent, improvements in margins in California and Florida
compared to the previous year.
Operating expenses increased by $13.3 million, or 29.5%, to $58.4 million for
the nine months ended September 30, 1998 from $45.1 million in the comparable
1997 period. $9.3 million of this is due to operating expenses incurred at
service centers acquired in the BHD acquisition. The remaining increase is due
to additional salaries, occupancy expense and other costs associated with new
and acquired service centers (other than BHD) and, to a lesser extent, payroll
and other operating costs required to support the increased sales volume at
existing service centers. Operating expenses as a percentage of net sales
decreased to 15.1% in the 1998 period compared to 15.8% in the 1997 period.
Operating expenses in 1997 were higher than historical averages because of
unseasonably cooler temperatures and wet and rainy weather in much of the United
States.
Interest and other expenses decreased $0.8 million to $2.7 million for the nine
months ended September 30, 1998 from $3.5 million in the comparable 1997 period.
The decrease was primarily attributable to lower interest expense resulting from
lower average
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
outstanding debt levels between periods and a more favorable interest rate on
the Senior Loan Facility.
Income taxes increased $4.1 million or 71.9% to $9.8 million for the three
months ended September 30, 1998 from $5.7 million for the three months ended
September 30, 1997. As a result of certain state tax planning strategies, the
Company's effective income tax rate decreased to 37.0% for the nine months ended
September 30, 1998 compared to 38.0% for the nine months ended September 30,
1997.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business is highly seasonal. In general, sales and net income are
highest during the second and third quarters, which represent the peak months of
swimming pool use and installation. Sales are substantially lower during the
first and fourth quarters, when the Company may incur net losses.
The Company experiences a build-up of inventory and accounts payable during the
first and second quarters of the year in anticipation of the peak swimming pool
supply selling season. The Company's peak borrowing occurs during the second
quarter, primarily because dated accounts payable offered by the Company's
suppliers typically are payable in April, May and June, while the Company's peak
accounts receivable collections typically occur in June, July and August.
The principal external factor affecting the Company's business is weather. Hot
weather can increase purchases of chemicals and supplies and pool installations.
Unseasonably cool weather or heavier than average amounts of rainfall during the
peak sales season can decrease purchases of chemicals and supplies and pool
installations. In addition, unseasonably early or late warming trends can
increase or decrease the length of the pool season and, therefore, the Company's
sales.
To encourage preseason orders, the Company, like many other swimming pool supply
distributors, utilizes preseason sales programs which provide for extended
dating terms and other incentives to its customers. Some of the Company's
suppliers also offer extended dating terms on certain products to the Company
for preseason or early season purchases. In offering extended dating terms to
its customers and accepting extended dating terms from its suppliers, the
Company effectively finances a portion of its receivables with extended
payables.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SEASONALITY AND QUARTERLY FLUCTUATIONS (CONTINUED)
The Company expects that its quarterly results of operations will continue to
fluctuate depending on the timing and amount of revenue contributed by new
service centers and acquisitions, if any. The Company attempts to open its new
stores at the end of the third quarter or the beginning of the fourth quarter to
take advantage of preseason sales programs and the peak season.
The following table sets forth certain unaudited quarterly data for 1997 and the
first three quarters for 1998 which, in the opinion of management, reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of such data. Results of any one or more
quarters are not necessarily indicative of results for an entire fiscal year or
of continuing trends.
<TABLE>
<CAPTION>
1997 1998
---------------------------------------------- ----------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Net sales $63,565 $124,790 $98,492 $48,175 $73,988 $178,450 $133,883
Gross profit 13,960 28,159 21,460 9,798 15,947 41,815 30,051
Operating income (loss) 104 11,496 6,847 (2,726) (1,156) 20,554 10,017
Net sales as a percentage of
annual net sales 19% 37% 29% 15% N/A N/A N/A
Gross profit as a percentage
of annual gross profit 19% 38% 29% 13% N/A N/A N/A
Operating income as a
percentage of annual
operating income 1% 73% 44% (18)% N/A N/A N/A
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's primary sources of working capital are cash flow from
operations and borrowings under the Senior Loan Facility, which consists of a
term loan and a revolving line of credit. The Company's borrowings under its
credit facilities, together with cash flow from operations and seller financing
have historically been sufficient to support the Company's growth and to finance
acquisitions. Considering the Company's borrowing base as of September 30, 1998,
the Company had approximately $30.0 million available for borrowing under the
Senior Loan Facility, the only additional credit source currently available to
the Company.
During the nine months ended September 30, 1998, $5.7 million of cash was
provided from operating activities primarily as a result of the timing of
certain payments related to taxes and bonuses, offset by the normal seasonal
increase in net working capital as discussed above. See "Seasonality and
Quarterly Fluctuations."
During the nine months ended September 30, 1998, the Company borrowed $13.4
million to meet seasonal working capital requirements and made scheduled
principal payments of $3.0 million required under its Senior Loan Facility.
Additionally, during the nine months ended September 30, 1998, the Company paid
$2.7 million of scheduled principal payments to sellers of acquired businesses.
Borrowings under the Senior Loan Facility may, at the Company's option, bear
interest at either (i) the agent bank's corporate base rate or the federal funds
rate plus 0.5%, whichever is higher, plus a margin ranging from 0.0% to 0.5% or
(ii) LIBOR plus a margin ranging from 0.75% to 2.00%, in each case depending on
the Company's leverage ratio.
Substantially all of the assets of the Company (other than certain inventory
which secures the Company's obligations to the seller of an acquired business),
including the capital stock of South Central Pool Supply, Inc., the Company's
wholly owned subsidiary, secure the Company's obligations under the Senior Loan
Facility. The Senior Loan Facility has numerous restrictive covenants which
require the Company to maintain minimum levels of interest coverage and fixed
charge coverage and which also restrict the Company's ability to pay dividends
and make capital expenditures. As of September 30, 1998, the Company was in
compliance with all such covenants and financial ratio requirements. The Senior
Loan Facility expires on December 31, 2002.
In December 1997, the Company completed a public offering of 2,025,000 shares of
Common Stock at a public offering price of $12.00 per share (after taking into
account a
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
3-for-2 stock split that occurred on July 13, 1998), resulting in net proceeds
to the Company of approximately $22.6 million. These proceeds were used to
finance the BHD acquisition in January 1998. Prior to the BHD acquisition, the
Company's acquisitions have been financed primarily by borrowings under the
Senior Loan Facility and seller notes. To finance future acquisitions, the
Company may utilize its ability to borrow additional funds under the Senior Loan
Facility or, depending on market conditions, incur additional indebtedness or
issue common or preferred stock (which may be issued to third parties or to
sellers of acquired businesses).
In August 1998, the Company acquired the capital stock of Nor-Cal Engineering,
Ltd., a distributor of swimming pool supplies based in Crawley, England.
On October 28, 1998, the Company announced that its Board of Directors had
authorized the use of up to $10 million to repurchase shares of the Company's
common stock during the year following the announcement. Stock that is
repurchased will be reserved for later reissue in connection with acquisitions,
employee benefit plans and other general corporate purposes. The repurchase
transactions may be made from time to time in the open market or directly from
stockholders at prevailing market prices that the Company deems appropriate. The
Company expects to fund any repurchases from its operating cash flow and/or
borrowings under its Senior Loan Facility.
YEAR 2000 ISSUE
The Company utilizes and relies upon computer technology in many facets of its
operations, including its inventory and ordering information systems, the
internal and external reporting of financial and operating information and other
systems and equipment, such as telephones and security systems. The Company is
currently continuing the process it initiated in 1997 of identifying and
remediating computer systems or other equipment which will not be Year 2000
compliant when handling date-related data beyond the twentieth century.
State of Readiness - The Company's core accounting and information systems are
based on consecutively numbered days, and not the "month-date-year" format which
is more vulnerable to Year 2000 problems. The Company's hardware and software
system vendors have assured the Company that its systems are able to correctly
function beyond 1999 when handling date-related data. To verify the assurances
of third-party hardware and software vendors regarding Year 2000 issues, the
Company is developing a hardware and software testing program. The testing is
scheduled to occur during the fourth quarter of 1998 and the first quarter of
1999, and the Company intends to begin any necessary remediation immediately
following the completion of the testing program. The Company is in the process
of collecting information from each of its service centers regarding all other
devices, such as personal computers, telephones, security systems, and office
and warehouse equipment which may have "embedded" microprocessors utilizing date
information. The assessment, testing and any necessary remediation of such
equipment is expected to be complete by June 1999. If the assessment, testing
and remediation steps described above are not accomplished in a timely manner,
the Year 2000 issue could have a material impact on the Company's operations.
The Company is communicating with its major suppliers and service providers and
certain large customers regarding their compliance with Year 2000 requirements.
The Company has sent out questionnaires to certain suppliers and service
providers to identify potential problems and assess the compliance efforts
undertaken by these parties. The Company has not yet received responses from all
such parties. There can be no guarantee that the systems of third parties will
be made compliant in a timely manner and would not have an adverse effect on the
Company.
Costs to address the Year 2000 issue - In 1997, the Company upgraded the
hardware and software of its core accounting and information systems for a total
cost of $1.5 million. The Company believes this cost was, for the most part, not
directly related to Year 2000 issues, but rather, the new systems were needed in
the normal course due to the growth the Company has experienced. Because it is
still in the assessment phase, the Company
13
<PAGE>
YEAR 2000 ISSUE (CONTINUED)
does not yet have an estimate on its Year 2000 assessment, testing and
remediation costs for all systems and equipment, but based on current
information the Company believes that such costs are not likely to have a
material adverse effect on the Company's business, financial condition or
operating results. Management anticipates funding the costs to address the Year
2000 issue with cash generated from operations and from borrowing capacity under
the Senior Loan Facility.
Risks presented by the Year 2000 issue - There may be unanticipated delays in
completing the Company's planned Year 2000 assessment and remediation and, as
the process of inventorying the systems proceeds, the Company may identify
additional systems that present a Year 2000 risk. In addition, if any third
parties who provide goods or services essential to the Company's business
activities fail to appropriately address their Year 2000 issues, such failure
could have a material adverse effect on the Company's business, financial
condition, or operating results. For example, a Year 2000 related disruption on
the part of the financial institutions which process the Company's transactions
could have a material adverse effect on the Company's business, financial
condition or operating results.
Contingency plans - The Company's Year 2000 initiative includes the development
of contingency plans to address failures of significant portions of the
Company's systems or failures by third parties who provide goods or services
essential to the Company's business to address their Year 2000 issues. The
Company expects to conclude the development of these contingency plans by the
end of the second quarter of 1999.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUE (CONTINUED)
INFLATION
The Company does not believe that inflation has had a significant impact on its
results of operations for the periods presented.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this Form 10-
Q are forward-looking statements that involve risks and uncertainties, including
but not limited to factors related to (i) the Company's ability to identify
appropriate acquisition candidates, complete acquisitions on satisfactory terms,
or successfully integrate acquired businesses; (ii) the sensitivity of the
swimming pool supply business to cool or rainy weather; (iii) the intense
competition and low barriers to entry in the swimming pool supply industry; (iv)
the Company's ability to obtain financing on satisfactory terms and the degree
to which the Company is leveraged; (v) the sensitivity of the swimming pool
supply business to general economic conditions; (vi) the Company's ability to
remain in compliance with the numerous environmental, health and safety
requirements to which it is subject; (vii) the risk of fire, safety and casualty
losses and related liability claims inherent in the storage of chemicals sold by
the Company; and (viii) the other factors discussed in the Company's filings
with the Securities and Exchange Commission. Such factors could affect the
Company's actual results and could cause such results to differ materially from
the Company's expectations described above.
15
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company currently is not involved in any legal proceedings in
which it is believed to have a material effect on the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
None
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCP POOL CORPORATION
--------------------
DATE: 11/13/98 BY: /s/ Craig K. Hubbard
--------------------- ---------------------------
Craig K. Hubbard, Chief Financial Officer,
Treasurer and Secretary and duly authorized
signatory on behalf of the Registrant
17
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
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FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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