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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee required)
For the fiscal year ended December 31, 1996
[ ] 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
Commission file number 0-26640
SCP POOL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3943363
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
109 Northpark Boulevard, Covington, LA 70433-5001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 504/892-5521
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Common Stock, par value $0.001
Section 12(g) of the Act: per share
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 No x
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the 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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 18, 1997 was approximately $52,292,500.
As of March 18, 1997 the Registrant had 4,223,829 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996, are incorporated by reference in Part II and the
Proxy Statement to be mailed to stockholders on or about April 4, 1997 for the
Annual Meeting to be held on May 7, 1997, are incorporated by reference in Part
III.
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PART I
ITEM 1. BUSINESS.
GENERAL
SCP Pool Corporation (the "Company") distributes swimming pool supplies and
related products to swimming pool remodelers and builders, independent retail
stores and swimming pool repair and service companies. The Company distributes
more than 30,000 national brand and private label products to over 20,000
customers. These products include both non-discretionary pool maintenance
products, such as chemicals and replacement parts, and pool equipment, such as
packaged pools (kits to build swimming pools which include walls, liners,
bracing and other materials), cleaners, filters, heaters, pumps and lights.
The Company is a successor to a business founded in 1980 by the Company's
current President and Chief Executive Officer, Frank J. St. Romain. The Company
and its wholly owned subsidiary, South Central Pool Supply, Inc. ("SCP Supply"),
were organized by Code, Hennessy & Simmons Limited Partnership ("CHS") and
members of the management of the Predecessor (as defined below) for the purpose
of acquiring substantially all of the assets and business of Lake Villa
Corporation (formerly known as South Central Pool Supply, Inc.), a Louisiana
corporation (the "Predecessor"). CHS had no relationship with the Predecessor
prior to such acquisition. On December 31, 1993, SCP Supply acquired
substantially all of the assets and business of the Predecessor in a leveraged
buyout (the "SCP Acquisition").
The Company currently operates 69 service centers in 22 states. During
1996, the Company added 23 service centers through the BLN Acquisition (as
defined below), after giving effect to the consolidation of certain service
centers acquired in connection therewith, and opened two new service centers.
Each service center generally serves customers within a 100-mile radius. A
significant portion of the Company's business is walk-in, while most of the
Company's service centers also offer local delivery. Each service center has an
on-site manager who is responsible for day-to-day operations, including sales,
inventory and accounts receivable management, customer relations and personnel.
In addition to the service center managers, the Company employs 60 full-time
salespersons who are devoted exclusively to developing and maintaining customer
relationships.
The Company's net sales have grown from approximately $32.1 million in 1990
to approximately $235.8 million in 1996. Traditionally, the Company's growth
has been achieved through increasing sales at existing service centers and by
opening service centers in new geographic markets. The Company's recent growth
has been augmented by eight acquisitions completed since January 1994. See "The
Acquisitions." The Company expects to continue its growth strategy by making
strategic acquisitions, opening service centers in new geographic markets and
increasing sales at existing service centers.
THE ACQUISITIONS
In January 1994, the Company substantially increased its operations by
acquiring certain assets of Aqua Fab Industries, Inc. ("Aqua Fab"), including
eight service centers (three of which the Company closed and consolidated into
existing service centers) in the midwest and southeast regions of the United
States (the "Aqua Fab Acquisition").
In February 1995, the Company acquired all of the outstanding capital stock
of Orcal Pool Supplies, Inc. ("Orcal") (the "Orcal Acquisition"). Management
believes that the Orcal Acquisition, in which the Company acquired nine fully
operational service centers located throughout California, was a cost-effective
means of entering one of the largest pool supply markets in the United States.
In March 1995, the Company acquired certain assets of Aqua Chemical Sales
and Delivery, Inc., (primarily inventory and a service center in Illinois) (the
"Aqua Acquisition"), in October 1995, the Company acquired certain assets of
Crest Distribution (primarily inventory and one service center in each of Oregon
and Washington), a division of Aman Enterprises, Inc. (the "Crest Acquisition"),
in November 1995, the Company acquired the capital stock of Steven Portnoff
Corporation (which operated a service center in Scottsdale, Arizona) (the
"Portnoff Acquisition"), and in December 1995, the Company acquired certain
assets of Pool Mart of Nevada, Inc. (primarily inventory and a service center in
Las Vegas, Nevada), an affiliate of Steven Portnoff Corporation (the "Pool Mart
Acquisition").
The Company's most significant acquisition to date occurred in September
1996, when the Company acquired certain assets (primarily inventory and property
and equipment) of The B-L Network, Inc. ("BLN"), a wholesaler of swimming pool
supplies with 39 service centers in 12 states (16 of which the Company has since
closed and consolidated into existing service centers) (the "BLN Acquisition"),
for an aggregate purchase price of approximately $34.2 million. The purchase
price was financed primarily through promissory notes payable to BLN, a portion
of which has since been repaid. In connection with the BLN Acquisition, the
Company sold the chemical manufacturing and repackaging assets of Alliance
Packaging, Inc ("Alliance Packaging"), a subsidiary of SCP Supply, to Bio-Lab,
Inc. ("Bio-Lab"), the parent of BLN, for approximately $5.4 million (the
"Alliance Sale"). In addition, the Company and Bio-Lab entered into two five-
year supply agreements pursuant to which Bio-Lab agreed to supply the Company
with certain chemical products previously supplied to it by Alliance Packaging
and with certain chemical products previously supplied to BLN by Bio-Lab (the
"Bio-Lab Supply Agreements").
INDUSTRY OVERVIEW
The swimming pool supply industry can be divided into four categories by
pool type: residential in-ground swimming pools, above-ground swimming pools,
commercial swimming pools and spas or hot tubs. The Company's strategy has been
to focus on distributing products to the residential in-ground and above-ground
and small commercial pool markets.
Management believes approximately 60% of total pool industry revenues are
based upon numerous ongoing maintenance and repair requirements associated with
pool ownership. The maintenance of proper chemical balance and the related
maintenance and repair of swimming pool equipment, such as pumps, heaters,
filters and cleaners, create a non-discretionary demand for pool chemicals and
other swimming pool supplies and services. The balance of pool supply industry
revenues is derived from sales of the parts and equipment required for pool
remodeling, overhaul and repair and from the sales and installation of new
swimming pools. Although the installation of new pools and, to a lesser extent,
the remodeling and overhaul of existing pools are affected by general economic
conditions, particularly new housing construction, management believes that most
continuing repair requirements are not as sensitive to these changes in economic
conditions.
The pool supply distribution industry is fragmented, with the majority of
sales spread among over 170 companies. The six largest distributors operate on
a national or regional basis, while the remaining distributors tend to be
family-owned operations with one to three distribution sites, typically serving
a highly localized customer base with a limited geographic focus.
During the last 10 years, the industry has experienced consolidation as
larger distributors have acquired smaller local and regional distributors and
have used their superior competitive position to increase market share. Such
consolidation has permitted the larger pool supply distributors to benefit from
various economies of scale resulting from increased net purchasing power and the
elimination of redundant management and other overhead expenses. Larger
distributors also have been able to take advantage of more sophisticated
management techniques and the development of management information systems
specifically designed to enhance customer service and increase operating
2
efficiency. Management anticipates further consolidation in the industry as
local and regional distributors confront competitive challenges from larger
distributors.
GROWTH STRATEGY
The Company intends to continue to make strategic acquisitions to further
penetrate existing markets and to expand into new markets. The Company
continuously seeks out appropriate acquisition candidates and is frequently
engaged in discussions regarding potential acquisitions. The Company completed
one acquisition in 1994, six acquisitions in 1995 and one acquisition in 1996.
The Company intends to open service centers in geographic areas not
currently served by the Company. In each of the last five years, the Company
has opened between two and four service centers in new geographic markets. Each
new service center requires approximately $75,000 of capital expenditures for
leasehold improvements and office and warehouse equipment and a minimum of
$250,000 of inventory.
The Company intends to capitalize on opportunities to increase sales at its
existing service centers. The Company's sales at service centers open more than
fifteen months have increased by over 12% each year since 1990. The Company
believes that it can increase its market share by expanding its private label
marketing programs for chemicals and in-ground vinyl pools with swimming pool
remodelers and builders and repair and service companies and by further
developing its joint marketing programs with its customers. The Company also
plans to increase the breadth of its replacement parts product offering and
periodically to add to its outside sales force.
PRODUCTS
The Company offers more than 30,000 national brand and private label
products to over 20,000 customers. The Company supplies a substantial majority
of the national brand products offered by swimming pool equipment manufacturers.
Sales of national brands account for a majority of the Company's net sales.
Management believes that national brands are attractive to many of the Company's
customers who seek consistent product quality throughout their operations,
particularly for heaters, pumps, filters and cleaners. The Company believes it
has good relationships with all of its major suppliers of national brands, many
of which provide important sales and marketing support to the Company.
Approximately one-half of the Company's chemical products, which include
chlorine, algicides, water clarifiers and Ph adjusters, are sold under the
Company's private brands. These brands include Regal7 for small retail and
professional customers, Clear Choice7 for larger retail customers and EZ-Clor7
for pool remodelers and builders, pool service and repair companies and larger
retail customers. Most of these chemical products are converted from bulk to
retail form by Bio-Lab and sold to the Company under the Bio-Lab Supply
Agreements. See "CPurchasing and Suppliers." The Company sells packaged in-
ground vinyl pools (which consist of prefabricated in-ground pool structures
with a vinyl liner) under the Company's Weatherking7 and Heldor7 brands. The
Company also sells a private label line of above-ground pool kits under the name
Dream LineTM and pool covers under the Cool CoversTM brand name.
MARKETING
The Company's principal marketing activities are conducted by a dedicated
sales force of 60 employees and by its 69 service center managers. The
Company's dedicated sales force has responsibility for developing and
maintaining customer relationships. These salespersons and service center
managers make calls on customers, distribute the Company's product catalog and
parts manual and provide promotional literature in the display areas of the
service center. The Company's commission program is designed to reward account
profitability and promote sales growth.
3
CUSTOMERS
The Company sells its products to over 20,000 customers, primarily swimming
pool remodelers and builders, retail swimming pool stores and swimming pool
repair and service companies. No customer accounted for more than 3% of the
Company's sales during 1996. The Company estimates that in 1996, sales to
swimming pool remodelers and builders accounted for approximately 40% of its
sales, while sales to retail pool stores accounted for approximately 30% of
sales, and sales to repair and service companies accounted for the remainder.
Swimming pool remodelers and builders purchase products to refurbish, retrofit
or overhaul existing pools and to build new pools. Customers that operate retail
pool stores tend to have a single outlet and typically purchase a relatively
broad range of products from the Company, including chemicals, maintenance
supplies, repair parts and other related products. Repair and service companies
tend to provide on-site repair and cleaning services for residential pools.
These customers tend to be very small and typically purchase chemical products,
maintenance supplies and repair parts. A substantial portion of the Company's
sales are derived from "walk-in" business, in which a customer selects the
products at the service center and transports the purchased products from the
service center immediately following the purchase. The Company also offers local
delivery service in most of the markets it serves.
The Company maintains a credit policy for qualified customers. Credit
policies and terms are established at the corporate level, and each service
center manager is responsible for overseeing and collecting from local accounts.
During each of the last three years, the Company's reserves have been adequate
to cover the Company's bad debt expense.
PURCHASING AND SUPPLIERS
The Company has a good relationship with its suppliers and, as a result, is
offered volume discounts, rebates, favorable return policies and promotional
allowances. The Company works closely with many of its suppliers to develop
joint marketing plans. In addition, it is common in the swimming pool supply
industry for manufacturers to offer extended dating terms on their products to
qualifying purchasers, such as the Company. Such terms are typically available
to the Company for pre-season or early season purchases.
Prior to October 31, 1996, a substantial portion of the Company's chemical
products were supplied by its subsidiary, Alliance Packaging. On October 31,
1996, Alliance Packaging sold certain of its assets to Bio-Lab and Bio-Lab and
the Company entered into the Bio-Lab Supply Agreements. Under the Bio-Lab
Supply Agreements, Bio-Lab supplies the Company with certain chemical products
previously supplied to it by Alliance Packaging and with certain chemical
products previously supplied to BLN by Bio-Lab.
The principal chemical raw materials used in the products sold by the
Company are granular chlorine compounds, which are commodity materials. The
prices of granular chlorine compounds are a function of, among other things,
manufacturing capacity and demand. Although price increases in granular
chlorine compounds generally result in higher costs of supplies to the Company,
the Company historically has passed through such increased costs to its
customers. There can be no assurance that the price of granular chlorine
compounds will not increase in the future or that the Company will be able to
pass on any such increase to its customers. The Company believes that reliable
alternate sources of supply are available for all of its products, including
chlorine products.
The Company regularly evaluates supplier relationships and considers
alternate sourcing as appropriate to assure competitive costs and quality
standards. One non-affiliated supplier, Pac-Fab, Inc., supplied approximately
11%, of the Company's material purchases in 1996. The Company currently has
long-term contracts with three of its largest suppliers, but does not have a
contract with Pac-Fab, Inc. The Company believes that it has good relationships
with all of its suppliers.
4
Decisions relating to pricing, suppliers and product selection are
centralized at the Company's headquarters, with significant input from each of
the Company's service centers. Decisions relating to purchases and inventory
management are made independently by each of the Company's service center
managers using the data provided by the Company's information systems.
COMPETITION
The Company faces intense competition from many regional and local
distributors in its markets, from several companies that distribute swimming
pool supplies on a national basis and, to a lesser extent, from mass market
retailers and large pool supply retailers. The Company believes that there are
five swimming pool supply distributors which compete with the Company on a
national or regional basis: Pool Water Products, Superior Pool Products, Inc. (a
subsidiary of Olin Corporation) Fort Wayne Pools, Hughes Supply and Benson Pump
Co. Barriers to entry in the swimming pool supply industry are relatively low,
and the risk of new competitors entering the market, particularly in local
areas, is high. Certain of the Company's competitors have substantially greater
capital resources than the Company.
The Company competes with other distributors for rights to distribute
brand-name products, and the loss of, or inability to obtain such rights could
have a material adverse effect on the Company. Management believes that the
competition for such distribution rights results in a competitive advantage to
larger distributors, such as the Company, and a disadvantage to small
distributors.
The Company believes that the principal competitive factors in pool supply
distribution are the quality and level of customer service, product pricing,
breadth and quality of products offered and consistency and stability of
business relationships with customers. The Company believes it competes
favorably with respect to each of these factors. Some geographic markets
serviced by the Company, particularly California, 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.
SEASONALITY AND WEATHER
The Company's business is highly seasonal. In 1996, approximately 63% of
the Company's net sales were generated in the second and third quarters of the
year, which represent the peak months of swimming pool use, installation,
remodeling and repair, and approximately 134% of the Company's operating income
was generated in such period. Sales are substantially lower during the first and
fourth quarters of the year, when the Company may incur net losses. The
principal external factor affecting the Company's business is weather.
Unseasonably late warming trends can decrease the length of the pool season and
unseasonably cool weather or extraordinary rainfall during the peak season can
decrease swimming pool use, installation and maintenance, each of which
adversely affects the Company's sales and operating profit. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
OperationsCSeasonality and Quarterly Fluctuations."
ENVIRONMENTAL, HEALTH AND SAFETY REGULATION
The Company's business is subject to regulation under federal, state, and
local environmental and health and safety requirements, including the Emergency
Planning and Community Right-to-Know Act, the Hazardous Materials Transportation
Act and the Occupational Safety and Health Act. Most of these requirements
govern the packaging, labeling, handling, transportation, storage and sale of
pool chemicals by the Company. In addition, the algicides sold by the Company
are regulated as pesticides under the Federal Insecticide, Fungicide and
Rodenticide Act and state pesticide laws, which primarily relate to labeling and
annual registration. While the Company expends considerable resources to operate
in substantial compliance with environmental, health and safety requirements,
there can be no
5
assurance that it will not be determined to be out of compliance with, or liable
under, such requirements. Such an instance of noncompliance or liability could
have a material adverse effect on the Company and its operating results. In
addition, such requirements are frequently changing, and, depending upon the
nature of any such changes, could require material capital expenditures by the
Company in the future.
The demand for the pool chemicals sold by the Company may also be affected
by changes in consumer attitudes toward pool chemical products for environmental
or safety reasons. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FIRE, SAFETY AND CASUALTY ISSUES
The Company stores chemicals at each of its 69 service centers. Certain
chemicals the Company stores are combustible oxidizing compounds and the storage
of such chemicals is strictly regulated by local fire codes. The Company
maintains strict policies and procedures regarding chemical handling and fire
and safety regulations, and has never incurred any material liability related to
its handling of chemicals. A fire, explosion or flood affecting one of the
Company's facilities, however, could give rise to liability claims against the
Company.
EMPLOYEES
At March 18, 1997, the Company employed approximately 809 persons on a
full-time basis, of whom 182 engaged in management, administration and
accounting, and credit and collections, 60 engaged in outside sales, 156 engaged
in service center management and 411 engaged in warehouse, production and
distribution operations. Of these employees, 71 are employed at the Company's
corporate headquarters in Covington, Louisiana. No employees are covered by
collective bargaining agreements. The Company believes it has good relations
with its employees. In connection with the peak summer selling season, the
Company typically employs additional warehouse, production and distribution
personnel during the months from May through August.
INTELLECTUAL PROPERTY
The Company has registered trademarks and tradenames for several of its
private label products. The Company believes the strength of its trademarks and
tradenames has been and will be beneficial to its business. The Company intends
to continue to protect and promote its marks.
ITEM 2. PROPERTIES.
As of March 18, 1997, the Company conducted its operations through 69
service centers located in 22 states. Service centers are located near customer
concentrations, typically in industrial, commercial or mixed-use zones. The
Company's executive offices are located in approximately 22,000 square feet of
leased space in Covington, Louisiana.
The Company's service centers range in size from approximately 7,200 square
feet to 30,000 square feet and consist of warehouse, counter, display and office
space. The Company owns service centers in Phoenix, Arizona and Fresno,
California. All of the Company's other properties are leased for terms which
expire between 1997 and 2009, and many of such leases may be extended. In
certain instances, the Company's service centers are leased from the former
owners of businesses acquired by the Company. The Company believes that no
single lease is material to its operations, and that alternate sites are
presently available at market rates. See Item 13, "Certain Relationships and
Related Transactions" and Note 7 to the Company's Consolidated Financial
Statements.
6
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation and proceedings
arising in the ordinary course of its business. There are no pending material
legal proceedings to which the Company is a party or to which the property of
the Company is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Common Stock of the Company is listed on the NASDAQ National Market
under the symbol "POOL." At March 18, 1997, there were 59 holders of record of
Common Stock.
The following table sets forth the high and low bid information for the
Common Stock during the fourth quarter of 1995 and each quarter of 1996.
Fiscal Year High Low
----------- ---- ----
1995..............4th Qtr. $11 1/4 $ 9 3/4
1996..............1st Qtr. 15 1/4 10
..................2nd Qtr. 20 14
..................3rd Qtr. 21 17 1/4
..................4th Qtr. 20 3/4 18
The bid information set forth above reflects inter-dealer prices, without
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
The Company currently intends to retain its earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. The Second Amended and Restated Credit Agreement dated as
of September 26, 1996, by and among SCP Supply, The First National Bank of
Chicago, as agent, and various lenders from time to time party thereto (the
"Senior Loan Facility") restricts the Company's ability to pay dividends. Any
future determination to pay cash dividends will be made by the board of
directors of the Company ("the Board") in light of the Company's earnings,
financial position, capital requirements, credit agreements and such other
factors as the Board deems relevant at such time. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
OperationsCLiquidity and Capital Resources" and Note 3 of the Notes to the
Company's Consolidated Financial Statements.
7
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company and
its Predecessor. This information should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements of the Company and
the Predecessor and related Notes thereto included herein.
THE COMPANY THE PREDECESSOR(1)
------------ ------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Net sales..................................... $235,844 $161,095 $101,977 $67,282 $54,101
Cost of sales................................. 183,814 123,974 77,488 50,861 40,749
-------- -------- -------- ------- -------
Gross Profit.............................. 52,030 37,121 24,489 16,421 13,352
Warehouse expense............................. 9,611 6,957 3,610 2,107 1,808
Selling and administrative expenses........... 31,139 19,907 13,518 8,618 7,180
Goodwill amortization......................... 793 735 683 - -
-------- -------- -------- ------- -------
Operating income......................... 10,487 9,522 6,678 5,696 4,364
Other income (expense):
Interest expense......................... (3,176) (5,113) (4,171) (100) (206)
Amortization expense..................... (698) (610) (498) - -
Management fees paid to stockholder...... - (208) (250) - -
Miscellaneous income..................... 823 228 118 121 81
-------- -------- -------- ------- -------
(3,051) (5,703) (4,801) 21 (125)
-------- -------- -------- ------- -------
Income before income taxes and
extraordinary loss......................... 7,436 3,819 1,877 5,717 4,239
Provision for income taxes (1)(2)............. 2,903 1,490 770 - 85
-------- -------- -------- ------- -------
Income before extraordinary loss (1)(2)....... $ 4,533 $ 2,329 $ 1,107 $ 5,717 $ 4,154
======== ======== ======== ======= =======
Income before extraordinary loss per share of
common stock
Primary............................. 1.07 $1.18 .79
Fully diluted....................... 1.05 1.13 .75
BALANCE SHEET DATA:
Working capital............................... $ 34,602 $ 21,187 $ 8,493 $ 5,817 $ 4,729
Total assets.................................. 113,245 75,397 50,675 11,306 9,911
Total debt.................................... 51,277 26,476 38,025 124 172
Stockholders' equity.......................... 36,810 32,277 3,037 6,767 5,623
==============
(1) The Predecessor elected to be treated as an S corporation for income tax
purposes, and accordingly did not pay federal and state (except in certain
states) income taxes during such period. The Company is, and has been since
its formation, a C corporation.
(2) During 1995 the Company recorded an extraordinary charge, net of applicable
income taxes, of approximately $750,000 for the write-off of loan financing
fees and a prepayment premium associated with the extinguishment of certain
indebtedness.
8
ITEM 7. 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 Predecessor steadily 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 by opening new service centers
and increasing sales to new and existing customers, and through strategic
acquisitions. From January 1, 1990 to March 18, 1997, the Company expanded from
8 service centers in 6 states to 69 service centers in 22 states, primarily
through acquisitions. See "The Acquisitions."
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 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 swimming pool supply industry is affected by various factors, including
general economic conditions, the level of new housing construction, weather and
consumer attitudes towards pool chemical 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.
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, 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.
The Company completed an initial public offering of its common stock in
October 1995. The net proceeds of the offering were used primarily to reduce
indebtedness and resulted in an extraordinary charge, net of tax, in the
Company's results of operations in the fourth quarter of 1995 of approximately
$750,000 to account for the write-off of deferred financing costs and the
payment of a prepayment premium associated with extinguishing such indebtedness.
In connection with the initial public offering, the management agreement between
the Company and its principal stockholder was terminated as of the consummation
of the offering and, as a result, no management fees will be payable with
respect thereto after such time.
9
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 year.
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 77.9 77.0 76.0
---------------------
Gross profit 22.1 23.0 24.0
Warehouse expense 4.1 4.3 3.5
Selling and administrative expenses 13.2 12.4 13.3
Goodwill amortization 0.3 0.4 0.7
----------------------
Operating income 4.5 5.9 6.5
Other income (expense):
Interest expense (1.3) (3.2) (4.1)
Amortization expense (0.3) (0.4) (0.5)
Miscellaneous 0.3 - (0.1)
----------------------
Income before income taxes and extraordinary loss 3.2% 2.3% 1.8%
======================
The following discussions compare the results of operations for the year
ended December 31, 1996 to the year ended December 31, 1995 and the results of
operations for the year ended December 31, 1995 to the year ended December 31,
1994.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased by $74.7 million, or 46.4%, to $235.8 million in 1996
from $161.1 million in 1995. An increase in sales at servie centers opened at
least 15 months of approximataely 19.0% accounted for $26.8 million of the
increase. Service centers acquired from BLN accounted for $21.2 million of the
increase, with the remaining increase resulting from sales at service centers
acquired in 1995.
Gross profit increased by $14.9 million, or 40.2%, to $52.0 million in 1996
from $37.1 million in 1995. Gross profit as a percentage of net sales, however,
declined .9% to 22.1% in 1996 from 23.0% in 1995. A majority of the decline in
gross profit margin was attributed to lower margins realized at the service
centers in California and Florida. Service centers in California and Florida
generated gross profit margins of 17.2% and 17.6%, respectively, compared to
24.3% for service centers outside these areas. The number of service centers
located in California and Florida increased from 2 on January 1, 1995 to 25 on
December 31, 1996.
Operating expenses increased by $13.9 million, or 50.5%, to $41.5 million
in 1996 from $27.6 million in 1995. This increase is reflective of (1)
salaries, occupancy expense and other costs associated with the acquired service
centers, and (2) payroll and other operating costs required to support the
increased sales volume at existing service centers. Operating expenses as a
percentage of sales increased to 17.6% in 1996 compared to 17.1% in 1995. This
increase was primarily attributable to an increase in bonuses as a percentage of
sales.
10
Interest and other expenses decreased to $3.1 million in 1996 from $5.7
million in 1995. The decrease was primarily attributable to the reduction in
the Company's debt with the proceeds from the Company's initial public offering
in October 1995, which resulted in a decrease in interest expense in 1996.
The provision for income taxes was $2.9 million in 1996 compared to $1.5
million in 1995. The increase is consistent with the increase in income before
income taxes.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales increased by $59.1 million, or 57.9%, to $161.1 million in 1995
from $102.0 million in 1994. An increase in sales at service centers opened at
least 15 months of approximately 15.7% accounted for $14.9 million of the
increase. Service centers acquired in connection with the 1995 acquisitions
accounted for $31.0 million of the increase in net sales, and an increase in
sales at new service centers accounted for $9.4 million of the total increase.
Gross profit increased by $12.6 million, or 51.4%, to $37.1 million in 1995
from $24.5 million in 1994. Gross profit as a percentage of net sales, however,
declined 1.0% to 23.0% in the 1995 period from 24.0% in the 1994 period. A
majority of the decrease in gross profit margin was attributable to lower
margins realized at the service centers acquired in the Orcal Acquisition, which
generated gross profit margins of approximately 19.1% versus 23.8% for all other
service centers. The Orcal Acquisition was completed in February 1995, which
made it difficult for the Company to fully implement its information systems and
train existing employees in time to meet the peak swimming pool supply selling
season. In addition, the Orcal service centers were stocked with inventory
purchased under the prior owner's less attractive purchasing terms. As a result,
the Company was unable to realize its purchasing economies. Increased
competition in certain geographic markets and higher product costs, particularly
for chemicals and packaged pools, also negatively impacted the gross profit
margin during the 1995 period.
Operating expenses increased by $9.8 million, or 55.1%, to $27.6 million in
1995 from $17.8 million in 1994, but declined as a percentage of sales to 17.1%
in 1995 from 17.5% in 1994. The dollar increase was primarily attributable to
salaries, higher occupancy expenses in California, commissions and other costs
associated with increased employment at the service centers acquired in
connection with the Orcal Acquisition. The decrease as a percentage of sales was
primarily attributable to the operating leverage achieved by spreading the
Company's fixed expenses over a larger revenue base.
Interest and other expenses increased to $5.7 million in 1995 from $4.8
million in 1994. The increase was primarily attributable to higher interest
rates and to increased interest expense related to the debt incurred in
connection with the various acquisitions.
The provision for income taxes was $1.5 million in 1995 and $770,000 in
1994. The increase is consistent with the increase in income before income
taxes.
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
11
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 fluctuate
depending on the timing and amount of revenue contributed by new service centers
and acquisitions. The Company attempts to open its new service centers at the
end of the fourth quarter or the beginning of the first quarter to take
advantage of preseason sales programs and the peak season.
The following table sets forth certain unaudited quarterly data for 1995
and 1996 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.
1996 1995
------------------------------------------- ------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- --------- ---------- --------- --------- --------- ---------- ---------
(Dollars in thousands)
Net sales......................... $41,145 $85,867 $62,344 $46,488 $25,846 $66,667 $47,229 $21,353
Gross profit...................... 9,273 20,042 13,531 9,184 5,954 14,799 10,399 5,969
Operating income (loss)........... 743 9,843 4,176 (4,275) 653 7,447 3,236 (1,814)
Net sales as a percentage of
annual net sales................ 18% 36% 26% 20% 16% 42% 29% 13%
Gross profit as a percentage of
annual gross profit............. 18% 38% 26% 18% 16% 40% 28% 16%
Operating income as a percentage
of annual operating income...... 7% 94% 40% (41%) 7% 78% 34% (19%)
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. As of December
31, 1996, the Senior Loan Facility consisted of a term loan and a revolving line
of credit. The Company's borrowings under its credit 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 December 31, 1996, the Company has approximately
$10 million available for borrowing under the Senior Loan Facility, the only
additional credit source currently available to the Company.
Borrowings under the Senior Loan Facility may, at the Company's option,
bear interest at either (i) the agent's corporate base rate or the federal funds
rate plus 0.5%, whichever is higher, plus a margin ranging from 0.0% to 1.0%
12
or (ii) LIBOR plus a margin ranging from 1.25% to 2.50%, in each case depending
on the Company's leverage ratio. Substantially all of the assets of the Company
(other than inventory acquired from BLN, which secures the Company's obligations
to BLN), including the capital stock of SCP Supply, 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
December 31, 1996, the Company was in compliance with all such covenants and
financial ratio requirements. The Senior Loan Facility expires on September 26,
2002.
During the year ended December 31, 1996, the Company borrowed $28.5 million
to meet seasonal working capital requirements and made payments of $29.5 million
under its revolving credit facility. In addition, the seller of BLN provided
$31.8 million of financing to the Company. This financing, which bears interest
at 6%, is due in varying monthly installments through September 1998.
Approximately $14.1 million of this financing was repaid through December 31,
1996, of which $4.4 million was paid from proceeds received in connection with
the Alliance Sale. In September 1996, the Company converted approximately $15.6
million due under its revolving credit facility to the term loan portion of the
Senior Loan Facility.
Excluding acquisitions, the Company made capital expenditures of $788,000
and $866,000 in the years ended December 31, 1996 and 1995, respectively.
To finance future acquisitions, the Company expects to utilize its ability
to borrow additional funds. Depending on market conditions, the Company may
also incur additional indebtedness or issue common or preferred stock (which may
be issued to third parties or to sellers of acquired businesses).
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
Annual Report on Form 10-K 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 liabilities claims inherent in the storage and
repackaging 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.
13
ITEM 8. FINANCIAL STATEMENTS.
See the attached Consolidated Financial Statements (pages F-1 through F-22).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Company's 1997 Proxy Statement to be filed
with the Commission.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's 1997 Proxy Statement to be filed
with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Company's 1997 Proxy Statement to be filed
with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's 1997 Proxy Statement to be filed
with the Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this report:
(a) (1) The Consolidated Financial Statements included in Item 8
hereof and set forth on pages F-1 through F-22.
(2) Financial Statement Schedules. All schedules are omitted,
because they are not applicable or are not required, or because
the required information is included in the consolidated
financial statements or notes thereto.
(3) The exhibits listed in the Index to the Exhibits.
(b) Reports on Form 8-K.
On October 9, 1996, the Company filed a report on Form 8-K disclosing
that (i) its wholly owned subsidiary, South Central Pool Supply,
Inc., had acquired substantially all of the assets of The B-L
Network, Inc. in exchange for promissory notes of the Company in an
aggregate amount of approximately $32.7 million; and (ii) its
indirect wholly owned subsidiary, Alliance Packing, Inc., had agreed
to sell certain assets, including inventory and fixed assets, to Bio-
Lab, Inc. The sale of assets by Alliance Packaging was completed on
October 31, 1996.
14
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 on March 27, 1997.
SCP POOL CORPORATION
By: /S/ WILSON B. SEXTON
---------------------------------------
Wilson B. Sexton, Chairman
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 in the capacities indicated on March 27, 1997
SIGNATURE TITLE
--------- -----
/S/ WILSON B. SEXTON Chairman and Director
- ---------------------------------
Wilson B. Sexton
/S/ FRANK J. ST. ROMAIN President, Chief Executive
- --------------------------------- Officer and Director
Frank J. St. Romain
/S/ CRAIG K. HUBBARD Chief Financial Officer,
- --------------------------------- Treasurer and Secretary
Craig K. Hubbard
/S/ ANDREW W. CODE Director
- ---------------------------------
Andrew W. Code
/S/ PETER M. GOTSCH Director
- ---------------------------------
Peter M. Gotsch
/S/ DOMINICK DEMICHELE Director
- ---------------------------------
Dominick DeMichele
/S/ ROBERT C. SLEDD Director
- ---------------------------------
Robert C. Sledd
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
- ------- -------------------- -----------
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Restated Bylaws of the Company. (1)
4.1 Form of certificate representing shares of Common Stock of the Company. (1)
4.2 Credit Agreement, dated as of December 31, 1993, by and among South Central
Pool Supply, Inc. (previously known as SCP Acquisition Corp.), The First
National Bank of Chicago, as agent, and various lenders from time to time
party thereto. (1)
4.3 Amendment No. 1 to Credit Agreement, dated as of September 1, 1994, by
and among South Central Pool Supply, Inc. ("SCP Supply"), The First National
Bank of Chicago, as agent, and various lenders from time to time party thereto. (1)
4.4 Amendment No. 2 to Credit Agreement, dated as of January 20, 1995, by and
among SCP Supply, The First National Bank of Chicago, as agent, and various
lenders from time to time party thereto. (1)
4.5 Amendment No. 3 to Credit Agreement, dated as of February 28, 1995, by
and among South Central Pool Supply, Inc., The First National Bank of Chicago,
as agent, and various lenders from time to time party thereto. (1)
10.1 Asset Purchase Agreement, dated as of December 31, 1993, by and among the
Company, SCP Acquisition Corp., and South Central Pool Supply, Inc. (1)
10.2 Registration Agreement, dated as of December 31, 1993, by and among the
Company, CHS, various management and outside investors, Berkeley Atlantic Income
Limited, BG Services Limited, and PNC Equity Management Corp. (1)
10.3 Asset Purchase Agreement, dated as of January 4, 1994, by and between Aqua Fab
Industries, Inc. and South Central Pool Supply, Inc. (1)
10.4 Amendment No. 1 to Asset Purchase Agreement, dated as of January 7, 1994, by and
among Aqua Fab Industries, Inc. and South Central Pool Supply Industries, Inc. (1)
10.5 Amendment No. 2 to Asset Purchase Agreement, dated as of January 18, 1994, by and
among Aqua Fab Industries, Inc. and South Central Pool Supply, Inc. (1)
10.6 Amendment No. 3 to Asset Purchase Agreement, dated as of February 17, 1994, by
and among Aqua Fab Industries, Inc. and South Central Pool Supply, Inc. (1)
10.7 Asset Purchase Agreement, dated as of January 20, 1995, by and among Alliance
Packaging, Inc., York Chemical Corporation and Wexco Incorporated. (1)
10.8 Stock Purchase Agreement, dated as of February 15, 1995, by and among the Company,
Orcal Pool Supplies, Inc. and Ronald Hetzner. (1)
10.9 Agreement, dated as of March 31, 1992, by and between Wexco and W.B. Sexton. (1)
10.10 Patent Assignment, dated as of January 20, 1995, between Wexco Incorporated and
Alliance Packaging, Inc. (1)
+10.11 ACL Supply Contract, dated as of January 11, 1995, by and between SCP Supply and
Occidental Chemical Corporation, a New York corporation. (1)
10.12 Management Agreement, dated as of December 31, 1993, by and between CHS Management
Limited Partnership, an Illinois limited partnership, and SCP Acquisition Corp. (1)
10.13 Management Agreement, dated as of February 28, 1995, by and between SCP Supply and
Ronald Hetzner. (1)
10.14 SCP Pool Corporation 1995 Stock Option Plan.* (1)
10.15 Form of Individual Stock Option Agreement.* (1)
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
- ------- -------------------- --------
10.16 Form of Convertible Subordinated Note dated as of December 31, 1993 issued by SCP
Holding Corp. (1)
10.17 Form of Junior Subordinated Note, dated as of December 31, 1993, issued
by SCP Holding Corp. (1)
10.18 Form of Executive Securities Agreement, dated as of December 31, 1993,
among SCP Holding Corp., Code Hennessy & Simmons Limited Partnership and certain
executives. (1)
10.19 Form of Lease, dated as of February 28, 1995, by and between Ronald Hetzner and
South Central Pool Supply, Inc. (1)
10.20 Lease, dated as of November 8, 1993, by and between Northpark Alliance, LLC and South
Central Pool Supply, Inc. (1)
10.21 Lease, dated as of November 7, 1991, by and between St. Romain Children's Trust and
South Central Pool Supply, Inc. (1)
+10.22 Sales Agreement, dated as of October 1, 1993, between PPG Industries, Inc. and SCP
Supply. (1)
10.23 Asset Purchase Agreement, dated as of September 7, 1995, by and among SCP Supply,
Aman Enterprises, Inc., Stephen Aman and Walter Aman. (2)
10.24 Stock Purchase Agreement, dated as of November 10, 1995, by and among SCP Supply,
Steven Portnoff Corporation and Steven Portnoff (2)
10.25 Asset Purchase Agreement, dated as of December 12, 1995, by and among SCP Supply,
Pool Mart of Nevada, Inc., Robert Portnoff, Sarah Portnoff and Steven Portnoff (2)
10.26 SCP Pool Corporation 1996 Non-Employee Director Equity Incentive Plan* (2)
10.27 Second Amended and Restated Credit Agreement, dated as of September 26, 1996, among
South Central Pool Supply, Inc., the First National Bank of Chicago and the
Institutions party thereto as lenders (3)
10.28 Asset Purchase Agreement, dated as of September 26, 1996, among South Central Pool
Supply, Inc., SCP Pool Corporation, The B-L Network, Inc. and Bio-Lab, Inc. (3)
10.29 Asset Purchase Agreement, dated as of September 26, 1996, among Alliance Packaging,
Inc., SCP Pool Corporation, South Central Pool Supply, Inc. and Bio-Lab, Inc. (3)
+10.30 Supply Agreement, among Bio-Lab, Inc., South Central Pool Supply, Inc., and SCP Pool
Corporation (3)
+10.31 Supply Agreement, dated as of September 26, 1996, among Bio-Lab, Inc., South Central
Pool Supply, Inc., and SCP Pool Corporation (3)
21.1 Subsidiaries of the registrant. (1)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
____________
+ Confidential Treatment Requested
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-92738.
(2) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(3) Incorporated by reference to the respective exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996.
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF SCP POOL CORPORATION
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets - December 31, 1996 and 1995.................... F-3
Consolidated Statements of Income - Years Ended December 31, 1996, 1995
and 1994................................................................... F-4
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1996, 1995 and 1994........................................................ F-5
Consolidated Statements of Cash Flows - Years Ended December 31,
1996, 1995 and 1994........................................................ F-6
Notes to Consolidated Financial Statements.................................. F-7
F-1
Report of Independent Auditors
The Board of Directors
SCP Pool Corporation
We have audited the consolidated balance sheets of SCP Pool Corporation as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 referred to above present
fairly, in all material respects, the consolidated financial position of SCP
Pool Corporation at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New Orleans, Louisiana
February 14, 1997
F-2
SCP Pool Corporation
Consolidated Balance Sheets
(In thousands, except share data)
DECEMBER 31
1996 1995
---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,621 $ 2,043
Receivables 25,293 12,090
Inventory 42,112 25,230
Prepaid expenses 632 363
Deferred income taxes 392 145
---------------------
Total current assets 73,050 39,871
Property and equipment, net 4,413 3,470
Goodwill, net 33,009 29,725
Other assets, net 2,773 2,331
---------------------
Total assets $113,245 $75,397
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,132 $12,726
Accrued and other current liabilities 7,907 3,075
Current portion of long-term debt 15,409 2,883
---------------------
Total current liabilities 38,448 18,684
Deferred income taxes 2,119 843
Long-term debt, less current portion 35,868 23,593
Stockholders' equity:
Preferred stock, $.01 par value;
100,000 shares authorized; no shares
issued and outstanding - -
Common stock, $.001 par value;
10,000,000 shares authorized;
4,222,809 shares issued and
outstanding 4 4
Additional paid-in capital 29,587 29,587
Retained earnings 7,219 2,686
---------------------
Total stockholders' equity 36,810 32,277
Total liabilities and stockholders' ---------------------
equity $113,245 $75,397
=====================
See accompanying notes.
F-3
SCP Pool Corporation
Consolidated Statements of Income
(In thousands, except per share data)
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------
Net sales $235,844 $161,095 $101,977
Cost of sales 183,814 123,974 77,488
-----------------------------------
Gross profit 52,030 37,121 24,489
Warehouse expense 9,611 6,957 3,610
Selling and administrative expenses 31,139 19,907 13,518
Goodwill amortization 793 735 683
-----------------------------------
Operating income 10,487 9,522 6,678
Other income (expense):
Interest expense (3,176) (5,113) (4,171)
Amortization expense (698) (610) (498)
Management fees paid to majority
stockholder - (208) (250)
Miscellaneous income 823 228 118
-----------------------------------
(3,051) (5,703) (4,801)
-----------------------------------
Income before income taxes and
extraordinary loss 7,436 3,819 1,877
Provision for income taxes 2,903 1,490 770
-----------------------------------
Income before extraordinary loss 4,533 2,329 1,107
Extraordinary loss, net of applicable
income taxes of $499 - 750 -
-----------------------------------
Net income 4,533 1,579 1,107
===================================
Income per share of common stock:
Primary:
Income before extraordinary loss $ 1.07 $ 1.18 $ .79
Extraordinary loss - .38 -
-----------------------------------
Net income $ 1.07 $ .80 $ .79
===================================
Fully diluted:
Income before extraordinary loss $ 1.05 $ 1.13 $ .75
Extraordinary loss - .36 -
-----------------------------------
Net income $ 1.05 $ .77 $ .75
===================================
Weighted average shares outstanding:
Primary 4,223 1,981 1,401
===================================
Fully diluted 4,308 2,066 1,486
===================================
See accompanying notes.
F-4
SCP Pool Corporation
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
CLASS A CLASS B ADDITIONAL
COMMON STOCK COMMON STOCK COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------------------------------------------------------------------------------------------
Balance at January 1, 1994 - $ - 1,275,361 $ 1 71,597 $ - $ 1,929 $ - $ 1,930
Net income - - - - - - - 1,107 1,107
-------------------------------------------------------------------------------------------
Balance at December 31, 1994 - - 1,275,361 1 71,597 - 1,929 1,107 3,037
Common stock issued - - 36,730 - - - 300 - 300
Recapitalization 2,069,406 2 (1,312,091) (1) (71,597) - 7,199 - 7,200
Initial public offering 2,053,403 2 - - - - 19,182 - 19,184
Exercise of overallotment option 100,000 - - - - - 977 - 977
Net income - - - - - - - 1,579 1,579
-------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,222,809 4 - - - - 29,587 2,686 32,277
Net income - - - - - - - 4,533 4,533
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 4,222,809 $4 - $ - - $ - $29,587 $7,219 $36,810
===========================================================================================
See accompanying notes.
F-5
SCP Pool Corporation
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------
OPERATING ACTIVITIES
Net income $ 4,533 $ 1,579 $ 1,107
Adjustments to reconcile net income to
net cash provided by operating
activities:
Write-off of loan financing fees - 1,249 -
Depreciation and amortization 2,503 2,069 1,566
Provision for doubtful accounts
receivable, net of write-offs 388 506 369
Provision for inventory obsolescence,
net of write-offs (86) 678 482
Provision for deferred income taxes 1,029 935 344
Loss (gain) on sale of property and
equipment 155 13 (5)
Changes in operating assets and
liabilities, net of effects of
acquisitions and disposals
Accounts receivable (12,571) (3,686) (2,198)
Inventory 4,877 (3,667) (5,590)
Prepaid expenses and other assets 31 (790) (337)
Accounts payable 2,638 1,981 3,048
Accrued and other current
liabilities 4,129 (88) 1,646
-------------------------------
Net cash provided by operating
activities 7,626 779 432
INVESTING ACTIVITIES
Acquisition of businesses (1,664) (11,108) (2,130)
Purchase of property and equipment (788) (866) (372)
Proceeds from sale of property and
equipment 73 127 19
-------------------------------
Net cash used in investing activities (2,379) (11,847) (2,483)
FINANCING ACTIVITIES
Net borrowings (repayments) of
revolving loan (1,000) 6,615 3,450
Proceeds from long-term debt - 7,200 -
Payments on long-term debt (1,669) (21,799) (1,500)
Issuance of common stock - 20,461 -
Payment of debt prepayment premium - (210) -
-------------------------------
Net cash provided by (used in)
financing activities (2,669) 12,267 1,950
-------------------------------
Change in cash and cash equivalents 2,578 1,199 (101)
Cash and cash equivalents at beginning
of year 2,043 844 945
-------------------------------
Cash and cash equivalents at end of year $ 4,621 $ 2,043 $ 844
===============================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the year
for:
Interest $ 3,279 $ 5,883 $ 3,285
===============================
Income taxes, net of refunds $ (561) $ (33) $ 1,121
===============================
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Long-term debt issued to acquire
businesses $ 31,846 $ 2,650 $
===============================
Long-term debt reduced through sale of
Alliance $ 4,376 $ $
===============================
See accompanying notes.
F-6
SCP Pool Corporation
Notes to Consolidated Financial Statements
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SCP Pool Corporation and its wholly owned subsidiaries (collectively referred to
as the Company) maintain 69 service centers in 22 states located throughout the
United States, except in the Northeast, from which they sell swimming pool
equipment and supplies to pool builders, retail stores, and service firms.
On September 26, 1996, the Company acquired certain assets, primarily inventory
and property and equipment, of The B-L Network, Inc. (BLN), a wholesaler of
swimming pool supplies with 39 service centers in 12 states. $31.8 million of
the aggregate purchase price was financed by BLN, with the remaining $2.4
million representing liabilities assumed (see Note 6) and other costs incurred
by the Company. This acquisition has been accounted for using the purchase
method of accounting and the results of operations have been included in the
accompanying consolidated financial statements since the date of acquisition.
The cost of the acquisition has been allocated as follows, on the basis of the
fair value of the assets acquired (in thousands):
Inventory $25,674
Other current assets 389
Property and equipment 2,705
Other assets 1,136
Goodwill 4,309
----------
$34,213
==========
Unaudited pro forma results of operations of the Company for the years ended
December 31, 1996 and 1995, giving effect to the BLN acquisition as if it had
occurred as of January 1, 1995, are as follows (in thousands, except per share
data):
1996 1995
----------------------
Net sales $362,066 $298,903
Gross profit $ 72,099 $ 61,005
Operating income $ 11,694 $ 9,419
Income before extraordinary loss $ 4,201 $ 962
Net income $ 4,201 $ 212
Net income per share:
Primary $ .99 $ .11
Fully diluted $ .98 $ .10
F-7
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited pro forma consolidated results of operations for the years ended
December 31, 1996 and 1995 include pro forma adjustments for the incremental
increase or decrease in amortization of goodwill and other intangible assets,
interest expense, and income taxes associated with the acquisition. It does not
reflect the anticipated savings in purchasing costs at BLN during the periods
presented, nor does it reflect cost savings from the closure of certain BLN
service centers.
In October 1996, the Company sold certain assets, including inventory and fixed
assets, of Alliance Packaging, Inc., a wholly owned subsidiary which operates a
manufacturing and repackaging facility in Dallas, Texas, to Bio-Lab, Inc. (Bio-
Lab), the parent company of BLN, for approximately $5.4 million which
approximated the book value of the assets sold.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
SEASONALITY AND WEATHER
The Company's business is highly seasonal. Sales are substantially lower during
the first and fourth quarters of the year, when the Company may incur net
losses. The principal external factor affecting the Company's business is
weather. Unseasonably early or late warming trends can increase or decrease the
length of the pool season and unseasonably cool weather or extraordinary
rainfall during the peak season can decrease swimming pool use, installation and
maintenance, each of which can adversely affect the Company's sales and
operating profit.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-8
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
CREDIT RISK
The Company performs periodic credit evaluations of its customers and generally
does not require collateral. Receivables are generally due within 30 days,
except for winter sales under early-buy programs for which extended terms are
given. Credit losses have been within management's expectations.
INVENTORIES
Inventories consist primarily of goods purchased for resale and are carried at
the lower of cost, using the average cost method, or market. At December 31,
1996 and 1995, the reserve for inventory obsolescence was approximately
$1,714,000 and $1,800,000, respectively. The reserve for inventory obsolescence
at each service center is based upon a number of factors, including the
experience of the manager at the service center, the previous operating
performance of the service center, geographical location, product offerings, and
other factors. The Company believes that the reserve for inventory obsolescence
may periodically require adjustment as the factors identified above change.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company provides for depreciation
principally by the straight-line method over estimated useful lives of three
years for autos and trucks, five to ten years for leasehold improvements, and
ten years for furniture and fixtures and machinery and equipment. Depreciation
expense was approximately $1,012,000, $724,000 and $385,000 in 1996, 1995 and
1994, respectively.
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized over 40 years. At December 31, 1996 and 1995,
accumulated amortization was approximately $2,211,000 and $1,418,000,
respectively. The recoverability of goodwill is assessed periodically and takes
into account whether the goodwill should be completely
F-9
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or partially written off or the amortization period accelerated. In evaluating
the value and future benefits of goodwill, the recoverability from operating
income is measured. Under this approach, the carrying value of goodwill would be
reduced if it is probable that management's best estimate of future operating
income before goodwill amortization will be less than the carrying amount of
goodwill over the remaining amortization period. In addition, the Company
assesses long-lived assets for impairment under FASB Statement No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (FAS 121). Under those rules, goodwill associated with assets
acquired in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate the carrying
amounts of those assets may not be recoverable.
OTHER ASSETS
Loan financing fees are being amortized over the term of the related debt. The
noncompete agreement and organization costs are being amortized over five years.
INCOME TAXES
Deferred income taxes are determined by the liability method in accordance with
Statement of Financial Accounting Standards (FAS) No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
IMPAIRMENT OF LONG-LIVED ASSETS
In January 1996, the Company adopted FAS 121 which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. FAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The adoption had no effect on the Company's financial statements.
F-10
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION ARRANGEMENTS
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts is presented
below (in thousands):
DECEMBER 31
1996 1995
--------------------
Receivables:
Trade accounts, less allowance of
$1,394 in 1996 and $1,006 in 1995 $21,578 $ 7,430
Recoverable income taxes - 552
Vendor rebates 1,451 1,387
Insurance claims - 1,793
Other 2,264 928
--------------------
$25,293 $12,090
====================
Property and equipment:
Land $ 475 $ -
Building 622 -
Autos and trucks 264 490
Machinery and equipment 1,411 2,176
Furniture and fixtures 2,648 1,375
Leasehold improvements 565 463
--------------------
5,985 4,504
Less accumulated depreciation 1,572 1,034
--------------------
$ 4,413 $ 3,470
====================
F-11
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED)
DECEMBER 31
1996 1995
--------------------
Other assets:
Loan financing fees $ 2,274 $ 1,725
Noncompete agreement 500 500
Organization costs 1,168 660
Other 347 310
--------------------
4,289 3,195
Less accumulated amortization 1,516 864
--------------------
$ 2,773 $ 2,331
====================
Accrued and other current liabilities:
Salaries, bonuses, and commissions $ 3,586 $ 2,099
Income taxes payable 1,883 116
Other 2,438 860
--------------------
$ 7,907 $ 3,075
====================
3. DEBT
The components of the Company's debt were as follows (in thousands):
DECEMBER 31
1996 1995
--------------------
Senior Revolving Note, variable rate
(effective interest rate of 9.25% at
December 31, 1996), due in 2002 $12,000 $13,000
Senior Term Note, variable rate
(effective interest rate of 9.25% at
December 31, 1996), payable in
quarterly installments of variable
amounts through 2002 24,000 10,701
Promissory Notes to BLN, interest rate
of 6%, payable in monthly installments
of variable amounts through 1998 13,384 -
8% Subordinated Notes, payable in
annual installments of $884,000
through 1998 1,768 2,650
10% Convertible Notes, due in 2002 125 125
--------------------
51,277 26,476
Less current portion 15,409 2,883
--------------------
$35,868 $23,593
====================
F-12
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
3. DEBT (CONTINUED)
Maturities of long-term debt for the five succeeding years are $15,409,000 in
1997, $6,743,000 in 1998, $5,000,000 in 1999, $5,000,000 in 2000, and $5,000,000
in 2001.
The credit agreements include, among other things, covenants which require the
Company to maintain minimum levels of interest coverage and fixed charge
coverage and also restrict the Company's ability to pay dividends and make
capital expenditures. At December 31, 1996, the Company was in compliance with
all such covenants. Substantially all of the assets of the Company (other than
inventory acquired from BLN, which secures the Company's obligations to BLN) are
pledged as collateral for the Senior Revolving Note and the Senior Term Note.
Available credit under the Senior Revolving Note is $43 million, subject to an
accounts receivable and inventory borrowing base limit. At December 31, 1996,
the unused available credit under the Senior Revolving Note was approximately
$10 million. The Company pays a quarterly commitment fee of .5% per annum of the
unused portion of available credit under the Senior Revolving Note. In September
1996, the Company converted approximately $15.6 million due under its Revolving
Note to the Term Note.
The Convertible Notes may be converted at any time through December 31, 2002
into shares of the Company's common stock at a conversion price of $1.47 per
share. At December 31, 1996, the conversion of these notes would result in the
issuance of 85,025 shares of the Company's common stock. Such shares have been
reserved by the Company.
The carrying amount of long-term debt approximates fair value. The fair value of
long-term debt was estimated using a discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
The net proceeds of the Company's initial public offering were used primarily to
reduce indebtedness and resulted in an extraordinary charge, net of tax in 1995
of approximately $750,000 ($.38 per share) for the write-off of loan financing
fees and a prepayment premium associated with extinguishing such indebtedness.
F-13
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets were
as follows (in thousands):
DECEMBER 31
1996 1995
-----------------
Deferred tax liabilities:
Goodwill $2,094 $ 893
Trade discounts on purchases 45 264
Prepaid expenses 119 119
Other 383 187
-----------------
Total deferred tax liabilities 2,641 1,463
Deferred tax assets:
Inventory 134 322
Allowance for doubtful accounts 544 392
Other 236 51
-----------------
Total deferred tax assets 914 765
-----------------
Net deferred tax liabilities $1,727 $ 698
=================
Significant components of the provision for income taxes, before the income tax
effect of the extraordinary loss, were as follows (in thousands):
DECEMBER 31
1996 1995 1994
-------------------------
Current:
Federal $1,634 $ 484 $ 362
State 240 70 64
-------------------------
1,874 554 426
Deferred:
Federal 898 816 292
State 131 120 52
-------------------------
1,029 936 344
-------------------------
Total $2,903 $1,490 $ 770
=========================
F-14
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the federal statutory rates to
income tax expense, before the income tax effect of the extraordinary loss, was
(in thousands):
DECEMBER 31
1996 1995 1994
-------------------------
Tax at statutory rates $2,528 $1,298 $ 638
Other, primarily state income taxes 375 192 132
-------------------------
Total $2,903 $1,490 $ 770
=========================
5. ISSUANCE OF COMMON STOCK AND EARNINGS PER SHARE
The Company issued 2,053,403 shares of its common stock in an initial public
offering in October 1995. In connection with the public offering, the Company
granted an overallotment option to the underwriters. In November 1995, the
underwriters exercised a portion of this option, and an additional 100,000
shares of the Company's common stock were issued.
A recapitalization occurred in connection with the public offering which
included (i) the conversion of all outstanding shares of the Company's Class B
common stock to Class A common stock, (ii) the exchange of $7,200,000 of Junior
Subordinated Notes for Class A common stock, (iii) reclassification of the
Company's Class A common stock to common stock, and (iv) a stock split in the
ratio of approximately 1.36-to-1.
Historical primary earnings per share is calculated by dividing net income by
the weighted average number of common shares outstanding during the year,
adjusted for the stock split. Historical fully diluted earnings per share is
calculated by dividing net income, as adjusted for the assumed reduction in
interest expense, net of tax, related to the Company's convertible notes by the
weighted average number of common shares outstanding during the year, adjusted
for the stock split and the shares contingently issuable upon the exercise of
the convertible notes payable.
The computation of net income, weighted average shares outstanding and
supplementary net income per share assuming the conversion of the Junior
Subordinated Notes at the initial public offering price for the years ended
December 31, 1995 and 1994 are calculated as follows as if the offering had
taken place on January 1, 1994 (in thousands, except per share data):
F-15
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
5. ISSUANCE OF COMMON STOCK AND EARNINGS PER SHARE (CONTINUED)
YEAR ENDED DECEMBER 31
1995 1994
-------------------------
NET INCOME
Primary:
Historical net income before
extraordinary loss $2,329 $1,107
Adjustment for interest expense, net
of tax in Junior Subordinated Notes 350 420
-------------------------
Adjusted net income before
extraordinary loss 2,679 1,527
Extraordinary loss (750) -
-------------------------
Adjusted net income $1,929 $1,527
=========================
Fully diluted:
Adjusted net income before
extraordinary loss $2,679 $1,527
Adjustment for interest expense, net
of tax, on Convertible Notes 8 8
-------------------------
Adjusted net income before
extraordinary loss 2,687 1,535
Extraordinary loss (750) -
-------------------------
Adjusted net income $1,937 $1,535
=========================
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary:
Historical weighted average shares of
common stock, adjusted for split 1,981 1,401
Adjustment for shares added as a
result of conversion of Junior
Subordinated Notes 537 686
-------------------------
2,518 2,087
Fully diluted:
Adjustment for shares related to
Convertible Notes 85 85
-------------------------
2,603 2,172
=========================
SUPPLEMENTARY NET INCOME PER SHARE
Primary:
Before extraordinary loss $ 1.07 $ .73
Extraordinary loss (.30) -
-------------------------
Adjusted net income $ .77 $ .73
=========================
Fully diluted:
Before extraordinary loss $ 1.03 $ .71
Extraordinary loss (.29) -
-------------------------
Adjusted net income $ .74 $ .71
=========================
F-16
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
5. ISSUANCE OF COMMON STOCK AND EARNINGS PER SHARE (CONTINUED)
The computation of net income, weighted average shares outstanding and
supplementary net income per share for the year ended December 31, 1995,
assuming the Company's public offering and conversion of Junior Subordinated
Notes had taken place on January 1, 1995, are as follows (in thousands, except
per share data):
NET INCOME
Primary:
Historical net income before
extraordinary loss $2,329
Adjustments:
Interest expense from the
recapitalization and the application
of net proceeds of the Offering 2,149
Management fee to majority
stockholder 208
Amortization of financing fees of
indebtedness repaid 142
Income tax effect (975)
---------
Adjusted net income 3,853
Fully diluted:
Adjustment for interest expense, net
of tax, on Convertible Notes 8
---------
Adjusted net income $3,861
=========
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary:
Historical weighted average shares of
common stock adjusted for split 1,981
Adjustment for shares added as a
result of:
Conversion of Junior Subordinated
Notes 537
Initial public offering 1,608
Exercise of overallotment option 97
---------
4,223
Fully diluted:
Adjustment for shares related to
Convertible Notes 85
---------
4,308
=========
SUPPLEMENTARY NET INCOME PER SHARE
Primary $.91
=========
Fully diluted $.90
=========
F-17
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES
The Company leases facilities for its service centers and corporate office and
vehicles under noncancelable operating leases that expire in various years
through 2009 but which have options to extend for various terms. Rental expense
under such operating leases was approximately $4,815,000 in 1996, $3,174,000 in
1995 and $1,641,000 in 1994. The future minimum lease payments as of December
31, 1996 related to noncancelable operating leases with initial terms of one
year or more are set forth below (in thousands):
1997 $ 5,479
1998 4,231
1999 3,413
2000 2,415
2001 1,371
Thereafter 2,705
----------
$19,614
==========
In connection with the acquisition of BLN, the Company recorded liabilities at
the date of acquisition of approximately $1,200,000 for lease buyouts, occupancy
costs and employee termination costs related to the planned closing of 16 BLN
facilities. As of December 31, 1996, the Company has closed all of the above-
mentioned BLN facilities and has a remaining accrual of approximately $700,000
to settle the remaining leases and pay any remaining severance costs. While
management believes this amount is adequate to finalize the closure of these BLN
facilities, the actual settlements may result in additional adjustments to this
accrual. Management expects all settlements to be completed in 1997.
Contemporaneously with the Company's acquisition of BLN and its sale of
Alliance, the Company entered into vendor supply agreements with Bio-Lab. Under
the terms of one of these agreements, the Company is required to purchase a
certain percentage of its annual requirements for the products it previously
purchased through Alliance at prices defined in that supply agreement. The
supply agreements have an initial term which expires September 26, 2001, with an
indefinite number of three-year renewal periods until terminated by either
party.
F-18
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the normal course of business, the Company becomes involved as a defendant or
plaintiff in various lawsuits. Although a successful claim for which the Company
is not fully insured could have a material effect on the Company's financial
condition, management is of the opinion that it maintains insurance at levels
generally consistent with industry standards to insure itself against the normal
risks of operations.
7. RELATED PARTY TRANSACTIONS
The Company leases an office building from a limited liability company, the
members of which include certain officers and stockholders of the Company and a
trust, the beneficiaries of which are children of an officer and stockholder of
the Company. The lease is a noncancelable operating lease which expires in 2009.
Rent expense for this lease was approximately $83,000 in 1996, $78,000 in 1995
and $44,000 in 1994.
The Company also leases its Baton Rouge service center facility from a trust,
the beneficiaries of which are children of an officer and stockholder of the
Company. This lease is a noncancelable operating lease which expires in 2000.
Rent expense for this lease was approximately $63,000 in 1996 and $62,000 in
1995 and $61,000 in 1994.
In connection with a 1995 acquisition, the Company entered into eight leases
with the acquired company's previous stockholder for warehouse facilities in
California. The lease agreements have initial terms of five years, commencing on
February 28, 1995, and monthly rental rates ranging from approximately $4,000 to
$9,000. The aggregate monthly rental for all eight leases is approximately
$46,000. At the end of the lease term, the Company has the option to renew each
lease for an additional five years at the then fair market rental rate. Rental
expense under these leases was approximately $775,000 in 1996 and $438,000 in
1995. In addition, in 1995 the Company paid $884,000 of the acquired company's
past due payables to an affiliate of the previous stockholder.
8. EMPLOYEE BENEFIT PLANS
The Company's employees participate in a Company-sponsored savings and
retirement plan which provides for discretionary Company contributions under a
profit-sharing provision. Employees who are eligible to participate in the
savings plan are able to contribute a percentage of their base compensation not
to exceed 10%, subject to a dollar limit. The Company contributes an amount
equal to 25% of employee contributions up to 6% of their base compensation.
Employee contributions are invested in certain equity and fixed
F-19
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
income securities based on employee elections. Matching contributions and
profit-sharing contributions made by the Company were $113,000 and $650,000 in
1996, $77,000 and $485,000, in 1995 and $53,000 and $275,000 in 1994.
9. STOCK OPTION PLANS
In February 1995, the Company's board of directors adopted the 1995 Stock Option
Plan under which the board of directors is authorized to grant, at its
discretion, to employees, agents, consultants or independent contractors of the
Company, options to purchase shares of common stock. The number of shares that
may be granted under this plan is limited to an aggregate of 400,000. Granted
options have an exercise price of not less than the fair market value of the
stock on the date of grant. Options generally are exercisable two years after
the date of grant and expire ten years after the date of grant.
In April 1996, the Company's board of directors adopted the SCP Pool Corporation
Non-Employee Directors Equity Incentive Plan, under which the Company grants to
each non-employee director options to purchase shares of the Company's common
stock. The number of shares that may be granted under this plan is limited to an
aggregate of 200,000. Granted options have an excerise price of not less than
the fair market value of the stock on the date of grant, and generally are
exercisable one year after the date of grant and expire ten years after the date
of grant.
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the
Company to disclose pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options under the
fair value method. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1996 and 1995, respectively: risk-free interest rates of
5.9% and 6.68%; a dividend yield of 0% for both years; volatility factors of the
expected market price of the Company's common stock of .32 for both years; and
expected lives of 3.4 and 2.5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and
F-20
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTION PLANS (CONTINUED)
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Had the Company's
stock based compensation plan been determined based on the fair value at the
grant dates, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
data):
YEAR ENDED DECEMBER 31
1996 1995
----------------------
Pro forma net income $ 4,392 $1,568
Pro forma earnings per share:
Primary $ 1.04 $ .79
Fully diluted $ 1.02 $ .76
A summary of the Company's stock option activity and related information for the
plans described above are as follows:
WEIGHTED
COMMON AVERAGE
STOCK EXERCISE
SHARES PRICE
--------------------
Outstanding at December 31, 1994 - $ -
Granted 31,284 5.15
--------------------
Outstanding at December 31, 1995 31,284 5.15
Granted 81,250 12.19
--------------------
Outstanding at December 31, 1996 112,534 $10.23
====================
In 1996 and 1995, the weighted average fair value of options granted were $3.61
and $1.38, respectively.
F-21
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTION PLANS (CONTINUED)
In February 1995, the Company granted options for 31,284 shares with an exercise
price of $5.15. At December 31, 1996, none of these options were exercisable and
their remaining contractual life was 8.2 years. In 1996, the Company granted
options for 81,250 shares, with exercise prices ranging from $11.25 to $17,
which had a weighted average remaining contractual life of 9.1 years at December
31, 1996. At December 31, 1996, 30,000 of the 1996 granted options were
exercisable at an exercise price of $11.25.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a tabulation of the Company's unaudited quarterly results of
operations for the year ended December 31, 1996 (in thousands, except per share
data):
QUARTER ENDED
3/31 6/30 9/30 12/31
----------------------------------------
Net sales $41,145 $85,867 $62,344 $46,488
Gross profit 9,273 20,042 13,531 9,184
Net income (loss) 78 5,615 2,168 (3,328)
Net income (loss) per share:
Primary $ .02 $ 1.33 $ .51 $ (.79)
Fully diluted .02 1.30 .50 (.77)
F-22