<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 MARCH 31, 1999 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
-----------------------------------------------------------------------
(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
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
(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 April 30, 1999, there were 11,510,433 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 (Unaudited)
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998..................................... 1
Consolidated Statements of Operations - Three
Months Ended March 31, 1999 and 1998....................... 2
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998................. 3
Notes to Consolidated Financial Statements -
March 31, 1999............................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 15
Part II. Other Information
Items 1. - 6.......................................................... 17
<PAGE>
SCP POOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,578 $ 4,911
Receivables 64,289 34,609
Inventory 105,866 69,377
Prepaid expenses 1,075 1,673
Deferred income taxes 1,812 1,600
-------------------------------
Total current assets 176,620 112,170
Property and equipment, net 6,745 5,435
Goodwill, net 48,143 43,940
Other assets, net 5,263 2,243
-------------------------------
Total assets $236,771 $163,788
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 84,379 $ 34,589
Accrued expenses and other current liabilities 10,042 10,909
Current portion of long-term debt 5,298 5,000
-------------------------------
Total current liabilities 99,719 50,498
Long-term liabilities:
Deferred income taxes 3,827 4,030
Long-term debt, less current portion 54,521 28,696
-------------------------------
Total long-term liabilities 58,348 32,726
-------------------------------
Total liabilities 158,067 83,224
Stockholders' equity:
Preferred stock, $.01 par value; 100,000 shares authorized - -
Common stock, $.001 par value; 20,000,000 shares authorized; 11,496,931 12 12
shares issued and outstanding
Treasury stock (2,678) -
Additional paid-in capital 53,251 52,516
Retained earnings 28,149 28,013
Accumulated other comprehensive income (30) 23
-------------------------------
Total stockholders' equity 78,704 80,564
-------------------------------
Total liabilities and stockholders' equity $236,771 $163,788
===============================
</TABLE>
Note: The balance sheet at December 31, 1998 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
MARCH 31,
1999 1998
---------------------------------
(Unaudited)
<S> <C> <C>
Net sales $98,906 $73,988
Cost of sales 76,151 58,041
---------------------------------
Gross profit 22,755 15,947
Selling and administrative expenses 20,456 16,848
Goodwill amortization 326 255
---------------------------------
Operating income/(loss) 1,973 (1,156)
Other income (expense):
Interest expense (852) (776)
Amortization expense (316) (210)
Miscellaneous income 274 269
---------------------------------
(894) (717)
---------------------------------
Income/(loss) before income taxes 1,079 (1,873)
Income tax provision (benefit) 401 693
---------------------------------
Income/(loss) before extraordinary item 678 (1,180)
Change in accounting principle, net of tax (544) -
---------------------------------
Net income/(loss) $ 134 $(1,180)
=================================
Net income/(loss) per share of common stock
Basic:
Income before change in accounting principle $ .06 $ (.10)
Change in accounting principle $ .05 $ -
---------------------------------
Net income/(loss) $ .01 $ (.10)
=================================
Diluted:
Income before change in accounting principle $ .06 $ (.10)
Change in accounting principle $ .05 $ -
---------------------------------
Net income/(loss) $ .01 $ (.10)
=================================
Average shares outstanding:
Basic 11,613 11,612
=================================
Diluted 11,908 11,612
=================================
</TABLE>
See accompanying notes.
2
<PAGE>
SCP POOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------- --------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income/(loss) before change in accounting principle $ 678 $ (1,180)
Adjustments to reconcile to net cash provided by/(used in)
operating activities (3,334) 2,404
-------- --------
Net cash (used in)/provided by operating activities (2,656) 1,224
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (21,823) (21,687)
Purchase of property and equipment (981) (511)
Proceeds from sale of property and equipment - 833
-------- --------
Net cash (used in) investing activities (22,804) (21,365)
FINANCING ACTIVITIES
Net borrowings of revolving loan 27,075 5,400
Payments on long-term debt (952) (1,000)
Issuance of common stock 735 31
Purchase of Treasury stock (2,678) -
-------- --------
Net cash provided by financing activities 24,180 4,431
Effect of exchange rate changes on cash (53) -
-------- --------
Net decrease in cash (1,333) (15,710)
Cash and cash equivalents at beginning of period 4,911 22,296
-------- --------
Cash and cash equivalents at end of period $ 3,578 $ 6,586
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 775 $ 503
======== ========
Income taxes, net of refunds $ 280 $ 1,108
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
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 business of SCP Pool Corporation and its wholly owned subsidiaries
(collectively referred to as the "Company") 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 months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. For
further information, refer to the consolidated financial statements for the year
ended December 31, 1998 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 March 31, 1999, the Company maintained 100 service centers in 34 states
and 2 service centers in the United Kingdom from which it sells swimming pool
equipment, parts and supplies to pool builders, retail stores, and service
firms.
In January 1999, the Company acquired certain assets of Benson Pump Company (the
"Benson Acquisition"), which distributed swimming pool supplies and related
products through its 20 service centers in 16 states, for a cash purchase price
of approximately $21.8 million (including payments related to a noncompete
agreement). The Company consolidated 13 of these service center locations into
the Company's existing service center locations. This acquisition was accounted
for using the purchase method of accounting. In January 1999, the Company
acquired the capital stock of Pratts Plastics Limited, which distributes
swimming pool supplies through one service center in Essex, England under the
trade name "The Swimming Pool Warehouse."
4
<PAGE>
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. EARNINGS PER SHARE
Basic income per common share equals net income divided by the weighted average
number of common shares outstanding during the period. Diluted income per
common share equals net income plus the after tax interest incurred on the
Company's convertible notes, divided by common shares outstanding after giving
effect to shares assumed to be issued on conversion of those notes.
In July 1998, the Board of Directors declared a three-for-two 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, shares, per-share data and related capital amounts for all
periods presented reflect the effects of this split.
In accordance with FAS 128, the Company has presented basic earnings per share,
computed on the basis of the weighted average number of shares outstanding
during the period, and diluted earnings per share, computed on the basis of the
weighted average number of shares and all dilutive potential shares outstanding
during the year. A reconciliation between basic and diluted weighted average
number of shares outstanding and the related earnings per share calculation is
presented below for each of the periods ended March 31:
1999 1998
------------------------------
Numerator:
Net income/(loss) $ 134 $ (1,180)
Adjustment for interest expense, net
of tax, on convertible notes 2 2
------------------------------
Numerator for diluted earnings per share $ 136 $ (1,178)
==============================
Denominator:
Denominator for basic earnings per share--
Weighted-average shares 11,613 11,612
Effect of dilutive securities:
Stock options 148 134
Convertible notes 147 147
==============================
Denominator for diluted earnings per share 11,908 11,893
==============================
Basic earnings per share $ .01 $ (.10)
==============================
Diluted earnings per share $ .01 $ (.10)
==============================
5
<PAGE>
SCP POOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities".
The Company adopted the SOP on January 1, 1999, and wrote-off the unamortized
balance of start-up costs of $863,000, net of a $319,000 tax benefit, as a
cumulative effect of an accounting change.
6
<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 its predecessor. From its inception in
1980 through the end of 1993, the Company's predecessor increased its sales by
opening new service center locations and by increasing sales to new and existing
customers. From January 1990 to March 1999, the Company expanded from 8 service
centers in 6 states to 100 service centers in 34 states and 2 service centers in
the United Kingdom, primarily through acquisitions. In January 1999, the Company
acquired for a purchase price of approximately $21.8 million (including payments
related to a noncompete agreement) substantially all of the assets of Benson
Pump Company, which distributed swimming pool supplies and related products
through its 20 service centers in 16 states. The Company consolidated 13 of
these service center locations into the Company's existing service center
locations.
The Company derives its revenues primarily from the sale of swimming pool,
equipment, parts and 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 primarily by the existing
installed base of 6-7 million pools in the United States and other factors,
including general economic conditions, consumer discretionary spending, new
housing construction, weather and consumer attitudes towards pool products.
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 such downturns.
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
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
GENERAL (CONTINUED)
markets serviced by the Company, particularly California, Florida, Texas and
Arizona, 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.
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------------------
Net sales 100.0% 100.0%
Cost of sales 77.0 78.4
------------------------
Gross profit 23.0 21.6
Selling and administrative expenses 20.7 22.8
Goodwill amortization .3 .3
------------------------
Operating income/(loss) 2.0 (1.5)
Other income (expense):
Interest expense (.9) (1.1)
Amortization expense (.3) (.3)
Miscellaneous .3 .4
------------------------
Income (loss) before income taxes
and extraordinary item 1.1% (2.5)%
========================
The following discussions compare the results of operations of the Company for
the three month periods ended March 31, 1999 and March 31, 1998.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net sales increased by $24.9 million, or 33.6%, to $98.9 million in the three
months ended March 31, 1999 from $74.0 million in the comparable 1998 period.
This increase was primarily due to sales at service centers acquired in 1998 and
1999, sales at newly opened service centers, and sales at existing service
centers. An increase in comparable
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
service center sales of 21.0% accounted for $11.6 million of the increase, and
sales attributable to acquired service centers accounted for $9.8 million of
the increase. The balance of the increase was attributable to sales at new
service centers opened less than 15 months.
Gross profit increased by $6.8 million, or 42.8%, to $22.7 million in the three
months ended March 31, 1999 from $15.9 million in the comparable 1998 period. An
increase in some store gross profit margin of 26.6% accounted for $3.2 million
of the increase. Gross profit as a percentage of net sales increased by
approximately 1.4% to 23.0% in the 1999 period from 21.6% in the 1998 period.
The increase in margin is attributable to the higher margins realized in 1999
across all divisions of SCP when compared to the prior year. The same store
gross profit margin as a percentage of sales increased by 1.1% compared to the
same quarter last year.
Operating expenses increased by $3.7 million, or 21.6%, to approximately $20.8
million for the three months ended March 31, 1999 from $17.1 million in the
comparable period in 1998. This increase is attributable to increases in
salaries, occupancy expense, and other costs associated with new service
centers, and the payroll and other operating costs required to support the
increased sales volume at existing service centers. Operating expenses as a
percent of net sales declined during this period to 21.0% in 1999 from 23.1% in
1998 as a result of the Company's ability to leverage its cost structure across
a larger revenue base and the elimination in 1999 of overhead costs associated
with Bicknell Huston Distributors, Inc.
Interest and other expense increased to $0.9 million in the three months ended
March 31, 1999 from $0.7 million in the comparable 1998 period. The increase
reflects higher interest and amortization expense primarily attributable to the
Benson Acquisition.
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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SEASONALITY AND QUARTERLY FLUCTUATIONS (CONTINUED)
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
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 extraordinary 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.
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 following peak season.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SEASONALITY AND QUARTERLY FLUCTUATIONS (CONTINUED)
The following table sets forth certain unaudited quarterly data for 1998 and the
first quarter for 1999 which, in the opinion of management, reflects all
adjustments (consisting of 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>
1999 1998
-------- -----------------------------------------------------------
1ST 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $98,906 $73,988 $178,450 $133,883 $71,277
Gross profit 22,755 15,947 41,815 30,051 14,726
Operating income (loss) 1,973 (1,156) 20,554 10,017 (4,030)
Net sales as a percentage of annual
net sales N/A 16% 39% 29% 16%
Gross profit as a percentage of
annual gross profit N/A 16% 41% 29% 14%
Operating income as a percentage of
annual operating income N/A (4)% 81% 39% (16)%
</TABLE>
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 the
Senior Loan Facility, 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 March
31, 1999, the Company had approximately $20.5 million available for borrowing
under the Senior Loan Facility, the only additional credit source currently
available to the Company.
During the three months ended March 31, 1999, the Company borrowed $27.0 million
to meet seasonal working capital requirements and made scheduled principal
payments of $1.2 million required under its Senior Loan Facility.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 2.0%, in each case depending on
the Company's leverage ratio. Substantially all of the assets of South Central
Pool Supply, Inc., including the capital stock of its wholly owned subsidiaries,
secure the 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
March 31, 1999, the Company was in compliance with all such covenants and
financial ratio requirements. The Senior Loan Facility expires on December 31,
2002.
With the exception of the acquisition of Bicknell Huston Distributors, Inc.
(which was financed through issuance of common stock to the public), the
Company's acquisitions have been financed primarily by borrowings under the
Senior Loan Facility and seller financing. 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).
Year 2000 Issue
The Company utilizes and relies upon computer technology in many facets of its
operations, including its inventory and order 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 and 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 has been testing its
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
YEAR 2000 ISSUE (CONTINUED)
hardware and software under a testing program. A portion of the testing was
conducted during the fourth quarter of 1998, and those tests did not identify
any areas of Year 2000 noncompliance. The Company has been working with
consultants during the first quarter of 1999 to develop additional testing
procedures, and the Company expects to perform such procedures during the second
and third quarters of 1999. The Company expects to work to remediate any Year
2000 noncompliance as such noncompliance is identified as a result of the
testing program. The Company is near completion of 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 September 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 received responses from a majority
of such parties. Since most of the responses indicated that efforts to comply
with Year 2000 requirements are ongoing, further communications with the
Company's major suppliers and service providers has been required. There can be
no assurances that the systems of third parties will be made compliant in a
timely manner and will not have an adverse effect on the Company.
Costs to Address the Year 2000 Issue - In 1998, the Company incurred costs of
$300,000 to upgrade certain data communications equipment. The Company believes
that this data communications upgrade would have been required in the normal
course, but the Company accelerated the timing of this upgrade in part to
improve its Year 2000 readiness. During the second quarter of 1999, the Company
will be upgrading its main system's server for a total cost of approximately
$700,000. The Company believes this cost is, for the most part, not directly
related to Year 2000 issues, but the upgrade enhances Year 2000 readiness
through improvements to the operating system software. Because it is still in
the assessment phase in some areas, the Company 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
YEAR 2000 ISSUE (CONTINUED)
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 has been working with consultants to develop such plans and expect to
conclude the development of these contingency plans during the third quarter of
1999.
14
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
INTEREST RATE RISK
As a result of the variable interest rates on the Senior Revolving Note and
Senior Term Note under the Senior Loan Facility, the Company's earnings are
exposed to changes in short-term interest rates. If (i) the variable rates on
the Company's Senior Loan Facility were to increase by 1% from the rate at
December 31, 1998; (ii) the Company borrowed the maximum amount available under
its revolving line of credit ($65.0 million) for all of 1999, and (iii) the
Company made all required payments of principal ($5 million) in 1999, solely as
a result of the increase in interest rates, then the Company's interest expense
would increase, resulting in a $292,000 decrease in net income, assuming an
effective tax rate of 37%. The fair value of the Company's Senior Revolving Note
and Senior Term Note is not affected by changes in market interest rates.
FOREIGN EXCHANGE RISK
The Company has two subsidiaries located in the United Kingdom for which the
functional currency is the British Pound. The Company typically does not hedge
its foreign currency exposure. Historically, fluctuations in British Pound/U.S.
dollar exchange rates have not had a material effect on the Company. Future
changes in the exchange rate of the U.S. dollar to the British pound may
positively or negatively impact the Company's revenues, operating expenses and
earnings; however, due to the size of its operations in the United Kingdom, the
Company does not anticipate its exposure to foreign currency rate fluctuations
to be material in 1999.
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 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 liabilities claims inherent in the storage of
chemicals sold by the Company; (viii) Year 2000 issues; and (ix) the other
factors discussed in the Company's filings with the Securities and Exchange
15
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(CONTINUED)
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" (CONTINUED)
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.
16
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company currently is not involved in any material legal
proceedings.
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.
17
<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: May 14, 1999 BY: /s/ Craig K. Hubbard
--------------------- -----------------------------------------
Craig K. Hubbard, Chief Financial Officer,
Treasurer and Secretary and duly authorized
signatory on behalf of the Registrant
18
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
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<ALLOWANCES> (2,824)
<INVENTORY> 105,866
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