Back to GetFilings.com
================================================================================
UNITED STATES
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
For the fiscal year ended December 31, 1998
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from to
Commission file number 0-26640
SCP POOL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3943363
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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 Section 12(g) of the Act: Common Stock, par value $0.001 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 X No
-------- -------
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 and non-voting common equity
held by non-affiliates of the registrant as of March 19, 1999 was approximately
$141,933,675.
As of March 19, 1999 the Registrant had 11,489,031 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be mailed to stockholders
on or about April 12, 1999 for the Annual Meeting to be held on May 12, 1999,
are incorporated by reference in Part III.
================================================================================
PART I
------
Item 1. Business.
- ------- ---------
General
SCP Pool Corporation (together with its wholly-owned subsidiaries, 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 34,000 national brand
and private label products to approximately 26,000 customers. These products
include both non-discretionary pool maintenance products, such as chemicals and
replacement parts, packaged pools (kits to build swimming pools which include
walls, liners, bracing and other materials), and pool equipment, such as
cleaners, filters, heaters, pumps and lights.
The Company is a successor to a business founded in 1980 by the Company's
former 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.
During 1998, the Company added 11 service centers in the northeastern
United States through an acquisition, one service center in California following
an inventory acquisition, and one service center in the United Kingdom through a
third acquisition. In 1998 the Company also opened five new service centers and
closed two service centers. As of December 31, 1998, the Company operated 89
service centers in 32 states and one service center in the United Kingdom.
During January 1999, the Company added 20 service centers located primarily in
the Midwestern United States through an acquisition (of which 13 are to be
consolidated into existing service centers) and one service center in the United
Kingdom through another acquisition. During the first fiscal quarter of 1999,
the Company also opened four new service centers. The Company currently operates
100 service centers in 34 states and two service centers in the United Kingdom.
The Company's net sales have grown from approximately $32.1 million in 1990
to $457.6 million in 1998. Operating income has increased from $2.1 million in
1990 to $25.4 million in 1998. The Company expects to continue its growth
strategy by opening service centers in new locations, increasing sales at
existing service centers and making strategic acquisitions.
The Acquisitions
In January 1994, the Company substantially increased its operations by
acquiring certain assets of Aqua Fab Industries, Inc., including eight service
centers (three of which the Company subsequently closed and consolidated into
existing service centers) in the midwest and southeast regions of the United
States.
In February 1995, the Company acquired all of the outstanding capital stock
of Orcal Pool Supplies, Inc., thereby adding nine service centers. In March
1995, the Company acquired certain assets of Aqua Chemical Sales and Delivery,
Inc., primarily inventory and a service center in Illinois. In October 1995, the
Company acquired certain assets, primarily inventory and one service center in
each of Oregon and Washington, of Crest Distribution, a division of Aman
Enterprises, Inc. In November 1995, the Company acquired the capital stock of
Steven Portnoff Corporation, which operated a service center in Scottsdale,
Arizona, and in December 1995, the Company acquired certain assets, primarily
inventory and a service center in Las Vegas, Nevada, of Pool Mart of Nevada,
Inc., an affiliate of Steven Portnoff Corporation.
In September 1996, the Company acquired certain assets (primarily
inventory, property and equipment) of The B-L Network, Inc. ("BLN"), a
wholesaler of swimming pool supplies with 39 service centers in 12 states (the
"BLN Acquisition"), for an aggregate purchase price of approximately $34.5
million. The Company subsequently consolidated 15 of the BLN service centers
into existing service centers. The purchase price for the BLN Acquisition was
financed primarily through the issuance of promissory notes payable to BLN which
have 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 and a subsidiary of Great Lakes Chemical Corporation,
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").
In January 1998, the Company acquired certain assets of Bicknell Huston
Distributors, Inc. ("Bicknell"), a wholesaler of swimming pool supplies with 11
service center locations in six northeastern states (the "Bicknell
Acquisition"), for an aggregate purchase price of approximately $21 million,
subject to certain adjustments. The purchase price for the Bicknell Acquisition
was financed through the offering to the public of 2,025,000 shares of the
Company's Common Stock in December 1997 (the "1997 Public Offering"). In
connection with the Bicknell Acquisition, the Company entered into a long-term
supply agreement (the "Pacific Supply Agreement") with Pacific Industries, Inc.,
a subsidiary of Cookson Group plc and the sole stockholder of Bicknell
("Pacific"). Under the terms of the Pacific Supply Agreement, Pacific will
supply the Company with polymer panels, braces, steps, liners and other products
used in the construction of in-ground vinyl pools. The Pacific Supply Agreement
has a term of eight years and is subject to renewal options. Mr. DeMichele, who,
prior to his death in December 1998, was a director of the Company, was also a
director of Pacific and held certain executive positions with affiliates of
Pacific. See "Certain Relationships and Related Transactions."
In February 1998, the Company aquired certain inventory of Valve
Engineering Acquisition Co., a distributor of swimming pool supplies in
Glendale, California.
In August 1998, the Company acquired the capital stock of Nor-Cal Limited,
which distributes swimming pool supplies through its service center in Crawley,
England (the "Nor-Cal Acquisition") and in January 1999, the Company acquired
the capital stock of Pratts Plastics Limited, which distributes swimming pool
supplies through its service center in Essex, England under the trade name "The
Swimming Pool Warehouse."
In January 1999, the Company acquired certain assets of Benson Pump
Company, a wholesaler of swimming pool supplies with 20 service center locations
in 16 states (the "Benson Acquisition"). The Company is in the process of
consolidating 13 of these service center locations into the Company's existing
service center locations. The aggregate purchase price for the Benson
Acquisition was approximately $21 million, subject to certain adjustments.
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
2
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 five 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 ten years, the industry has experienced consolidation as
certain larger distributors have acquired smaller local and regional
distributors. Such consolidation has permitted the larger pool supply
distributors to benefit from various economies of scale. 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 efficiency.
Management anticipates further consolidation in the industry and increased
competition as a result.
Growth Strategy
The Company intends to continue to make strategic acquisitions to further
penetrate existing markets and to expand into new geographic 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, five acquisitions in 1995, one acquisition in
1996, three acquisitions in 1998 and two acquisitions in January 1999.
The Company intends to open service centers in geographic areas which are
not currently served by, or are underserved by, the Company. The Company has
opened nineteen new service centers during the last five years. 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 also intends to open satellite service centers that are
smaller than the Company's typical service center, stock fewer inventory items
and have fewer employees and a lower cost structure, yet have access to the
Company's full inventory through its information systems.
The Company intends to capitalize on opportunities to expand sales at its
existing service centers. Comparable service center sales increased 15%, 16%,
19%, 11% and 14% in 1994, 1995, 1996, 1997 and 1998, respectively. 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 34,000 national brand and private label
products to approximately 26,000 customers. These products include both non-
discretionary pool maintenance products, such as chemicals and replacement
parts, packaged pools (kits to build swimming pools which include walls, liners,
bracing and other materials), and pool equipment, such as cleaners, filters,
heaters, pumps and lights. The Company supplies a substantial majority of the
national brand products offered by swimming pool equipment manufacturers. Sales
of national brands accounted for a majority of the Company's net sales in 1998.
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-third 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 Regal/R/, and EZ-Clor/R/, which
are sold to retail and professional customers, pool remodelers and builders, and
pool service and repair companies. Most of these chemical products are converted
from bulk to retail form by Bio-Lab and sold to the Company under the Bio-Lab
3
Supply Agreements. See "--Purchasing 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 Weatherking(R), Heldor(R), Signature
Pools/TM/, Regatta Pools/TM/ and Prestige/TM/ brands. The Company also sells a
private label line of above-ground pool kits under the name Dream Line/TM/ and
pool covers under the Cool Covers/TM/ brand name.
Marketing
The Company's principal marketing activities are conducted by a dedicated
sales force of 84 employees and by its 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. Under the Company's incentive program, salespersons may earn bonuses of
up to 50% of their annual salaries, based on attainment of certain sales and
profitability targets.
Customers
The Company sells its products to approximately 26,000 customers, primarily
swimming pool remodelers and builders, retail swimming pool stores and swimming
pool repair and service companies. No customer accounted for more than 1% of the
Company's sales during 1998. The Company estimates that in 1998, 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 "delivery" business, in which local deliveries of
products are made directly to customer locations. The Company also offers "walk-
in" service in all 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 bad debt expense was less
than 0.25% of net sales.
Purchasing and Suppliers
The Company has a good relationship with its suppliers which generally
offer competitive pricing, rebates, 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. In addition, in connection with
the Bicknell Acquisition, the Company entered into the Pacific Supply Agreement
with Pacific, the sole stockholder of Bicknell. Under the terms of the Pacific
Supply Agreement, Pacific will supply the Company with polymer panels, braces,
steps, liners and other products used in the construction of in-ground pools.
The Pacific Supply Agreement has a term of eight years, subject to renewal
options.
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
4
things, manufacturing capacity and demand. Although price increases in granular
chlorine compounds generally result in higher costs of supplies to the Company,
the Company generally 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. The Company's largest non-affiliated suppliers are Pac-Fab, Inc. (a
subsidiary of Essex Corporation), Hayward Pool Products, Inc. and Bio-Lab, and
these suppliers provided approximately 15%, 13% and 8%, respectively, of the
Company's material purchases in 1998. In 1998, Pacific supplied approximately 4%
of the Company's purchases, and Pacific is expected to supply a similar
percentage of the Company's purchases in 1999. See "Certain Relationships and
Related Transactions." The Company currently has long-term contracts with Bio-
Lab and Pacific, but does not have contracts with Pac-Fab, Inc. or Hayward Pool
Products, Inc. The Company believes that it has good relationships with all of
its suppliers.
Decisions relating to pricing, suppliers and product selection are
decentralized at the Company's service centers, with significant input from the
Company's headquarters. 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: Hughes Supply, Inc., Pool Water Products, Superior
Pool Products, Inc. (a subsidiary of Arch Chemicals, Inc.), Gorman Company (a
division of Hajoica) and Fort Wayne Pools. Barriers to entry in the swimming
pool supply industry are relatively low.
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, Arizona, Texas and Florida,
tend to be more competitive than others.
Seasonality and Weather
The Company's business is highly seasonal. In 1998, approximately 68% 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 120% 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 typically incurs 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
Operations--Seasonality and Quarterly Fluctuations."
5
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 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.
Fire, Safety and Casualty Issues
The Company stores chemicals at each of its 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 could give rise to liability claims against the Company.
Employees
As of March 9, 1999, the Company employed approximately 1,100 persons on a
full-time basis, of whom 270 engaged in management, administration and
accounting, and credit and collections, 84 engaged in outside sales, 176 engaged
in service center management and 570 engaged in warehouse, production and
distribution operations. Of these employees, 82 are employed at the Company's
corporate headquarters in Covington, Louisiana. In January, 1999, 91 of these
employees were added to the Company in connection with the Benson Acquisition.
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.
Trademarks
The Company maintains registered trademarks in the United States, primarily
for its private label products, and intends to maintain the trademark
registrations which it deems important to its business operations.
Item 2. Properties.
As of March, 1999, the Company conducted operations through 102 service
center locations located in 34 states and the United Kingdom. Service centers
are located near customer concentrations, typically in industrial, commercial or
mixed-use zones. The Company's executive offices are located in approximately
26,000 square feet of leased space in Covington, Louisiana.
The Company's service centers range in size from approximately 6,000 square
feet to 51,000 square feet and consist of warehouse, counter, display and office
space. The Company owns the location of a former service center in Phoenix,
Arizona, and the Company has entered a contract to sell such facility. In
February, 1998, the Company sold
6
a facility in Fresno, California and leased it back from the purchaser for a
three-year period beginning March 1, 1998. All of the Company's other properties
are leased for terms which expire between 1999 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.
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 began trading on the Nasdaq National Market
under the symbol "POOL" in October 1995. At March 19, 1999, there were 54
holders of record of Common Stock.
The following table sets forth, for the period indicated, the range of high
and low bid prices for the Common Stock as reported by the Nasdaq National
Market, as adjusted to reflect a three-for-two stock split in July 1998.
Fiscal Year High Low
----------- ------- -------
1997
First Quarter................... $10.667 $ 8.781
Second Quarter.................. 11.115 8.667
Third Quarter................... 11.552 9.115
Fourth Quarter.................. 16.000 11.000
1998
First Quarter................... 15.672 12.250
Second Quarter.................. 16.922 14.672
Third Quarter................... 16.578 12.000
Fourth Quarter.................. 15.875 9.000
The bid information set forth above reflects inter-dealer prices, without
retail mark-ups, markdowns or commissions 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 Third Amended and Restated Credit Agreement dated as of
December 31, 1997, by and among SCP Supply, the institutions from time to time
party thereto as lenders, LaSalle National Bank as Agent and Co-Arranger and
Hibernia National Bank as Co-Arranger (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,
7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 3 of the Notes to the
Company's Consolidated Financial Statements.
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
--------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------
(Dollars in thousands, except per share data)
Statement of Income Data:
Net sales..................................... $457,598 $335,022 $235,844 $161,095 $101,977
Cost of sales................................. 355,059 261,645 183,814 123,974 77,488
-------- -------- -------- -------- --------
Gross profit........................... 102,539 73,377 52,030 37,121 24,489
Warehouse expense............................. 20,593 14,416 9,611 6,957 3,610
Selling and administrative expenses........... 55,459 42,355 31,139 19,907 13,518
Goodwill amortization......................... 1,102 885 793 735 683
-------- -------- -------- -------- --------
Operating income....................... 25,385 15,721 10,487 9,522 6,678
Other income (expense):
Interest expense....................... (3,480) (4,482) (3,176) (5,113) (4,171)
Amortization expense................... (848) (708) (698) (610) (498)
Management fees paid to stockholder.... -- -- -- (208) (250)
Miscellaneous income................... 724 852 823 228 118
-------- -------- -------- -------- --------
(3,604) (4,338) (3,051) (5,703) (4,801)
-------- -------- -------- -------- --------
Income before income taxes and................ 21,781 11,383 7,436 3,819 1,877
extraordinary loss
Provision for income taxes (1)................ 8,043 4,327 2,903 1,490 770
-------- -------- -------- -------- --------
Income before extraordinary loss (1).......... $ 13,738 $ 7,056 $ 4,533 $ 2,329 $ 1,107
======== ======== ======== ======== ========
Income before extraordinary loss per share of
common stock
Basic (2).................................. 1.18 0.73 0.48 0.52 0.35
Diluted (2)................................ 1.15 0.71 0.46 0.50 0.33
Balance Sheet Data:
Working capital............................... $ 61,672 $ 63,387 $ 34,602 $ 21,187 $ 8,493
Total assets.................................. 163,788 136,452 113,245 75,397 50,675
Total debt, including current portion......... 33,696 39,889 51,277 26,476 38,025
Stockholders' equity.......................... 80,564 66,635 36,810 32,277 3,037
(1) The Company recognized an extraordinary loss, net of tax, in 1995 of
$750,000, or $0.17 per share on a diluted basis, in connection with the
write-off of loan financing fees and a prepayment premium associated with
the application of the proceeds of the Company's initial public offering to
reduce indebtedness.
(2) Earnings per share information has been restated to reflect the two three-
for-two splits in September, 1997 and July, 1998 and the adoption of FASB
128, Earnings per Share.
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 Company has grown through strategic acquisitions, by opening new service
centers and by increasing sales to new and existing customers. From January 1990
to March 1999, the Company expanded primarily through acquisitions from eight
service centers in six states to a total of 102 service centers, 100 of which
operate in 34 states in the United States and two of which operate in the United
Kingdom. 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. Losses from customer
receivables have historically been less than 0.25% of net sales.
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, consumer saving and discretionary spending levels,
the level of new housing construction, weather and consumer attitudes towards
pool products for environmental or safety reasons. Although management believes
that the Company's geographic diversity could mitigate the effect of a regional
economic downturn and that the continuing maintenance and repair needs for
existing swimming pools could mitigate the effect of a general economic
downturn, there can be no assurance that the Company's results of operations and
expansion plans would not be materially adversely affected by any of such
downturns.
The principal components of the Company's expenses include the cost of
products purchased from manufacturers and sold during the year, and operating
expenses, which are primarily related to labor, occupancy, commissions and
marketing. Some geographic markets serviced by the Company, particularly
California, Arizona, Texas, and Florida, tend to be more competitive than
others. In response to competitive pressures from any of its current or future
competitors, the Company may be required to lower selling prices in order to
maintain or increase market share, and such measures could adversely affect the
Company's gross margins and operating results.
9
Results of Operations
The following table shows, for the periods indicated, information derived
from the consolidated statements of income of the Company expressed as a
percentage of net sales for such year.
Year Ended December 31
1998 1997 1996
------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 77.6 78.1 77.9
------------------------
Gross profit 22.4 21.9 22.1
Warehouse expense 4.5 4.3 4.1
Selling and administrative expenses 12.1 12.6 13.2
Goodwill amortization 0.2 0.3 0.3
------------------------
Operating income 5.6 4.7 4.5
Interest expense (0.8) (1.3) (1.3)
Amortization expense (0.2) (0.3) (0.3)
Other income (expense): 0.2 0.3 0.3
------------------------
Income before income taxes 4.8% 3.4% 3.2%
========================
The following discussions compare the results of operations for the year
ended December 31, 1998 to the year ended December 31, 1997 and the results of
operations for the year ended December 31, 1997 to the year ended December 31,
1996.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales increased by $122.6 million, or 36.6%, to $457.6 million in the
year ended December 31, 1998 from $335.0 million in the comparable 1997 period.
This increase was primarily due to sales at service centers acquired in 1998,
sales at newly opened service centers, and increased sales at existing service
centers. Service centers acquired in 1998 contributed $69.2 million to the
increase, sales at newly opened centers accounted for $9.1 million of the total
increase, and an increase of approximately 13.6% in sales at service centers
open at least 15 months contributed $44.3 million to the increase.
Gross profit increased by $29.1 million, or 39.6%, to $102.5 million in the
year ended December 31, 1998 from $73.4 million in the comparable 1997 period.
Gross profit as a percentage of net sales improved to 22.4% in the 1998 period
from 21.9% in the 1997 period due primarily to higher margins at service centers
acquired in the Bicknell Acquisition and also due to improved margins in
California, Florida and the central United States compared to the same period in
the previous year.
Operating expenses increased by $19.4 million, or 33.6%, to $77.1 million
in the year ended December 31, 1998 from $57.7 million in the comparable 1997
period. This increase is reflective of salaries, occupancy expense and other
costs associated with new service centers, and, to a lesser extent, payroll and
other operating costs required to support the increased sales volume at existing
service centers. Operating expenses as a percentage of net sales decreased to
16.8% in the 1998 period compared to 17.2% in the 1997 period, primarily as a
result of greater internal operating efficiences.
Interest and other expenses decreased to $3.6 million in the year ended
December 31, 1998 from $4.3 million in the comparable 1997 period. The decrease
was primarily attributable to lower interest expense resulting from lower
average outstanding debt levels between periods and a more favorable interest
rate on the Senior Loan Facility.
10
The provision for income taxes increased $3.7 million, to $8.0 million for
1998 compared to $4.3 million for 1997 primarily due to the $10.4 million
increase in income before income taxes. The Company's effective tax rate
decreased to 37.0% for 1998 from 38.0% for 1997 to reflect decreases in the
Company's blended state income tax rate.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales increased by $99.2 million, or 42.1%, to $335.0 million in the
year ended December 31, 1997 from $235.8 million in the comparable 1996 period.
This increase was primarily due to sales at service centers acquired from BLN,
sales at newly opened service centers and increased sales at existing service
centers. Service centers acquired from BLN in September 1996 contributed $79.8
million to the increase, sales at newly opened centers accounted for $12.7
million of the total increase and an increase of approximately 11.4% in sales at
service centers open at least 15 months contributed $12.4 million to the
increase. These increases were partially offset by the loss of revenue from the
assets of Alliance Packaging, Inc., which were sold in October 1996.
Gross profit increased by $21.4 million, or 41.2%, to $73.4 million in the
year ended December 31, 1997 from $52.0 million in the comparable 1996 period.
Gross profit as a percentage of net sales remained relatively unchanged at 21.9%
in the 1997 period compared to 22.1% in the 1996 period.
Operating expenses increased by $16.2 million, or 38.8%, to $57.7 million
in the year ended December 31, 1997 from $41.5 million in the comparable 1996
period. This increase is reflective of salaries, occupancy expense and other
costs associated with new service centers, and, to a lesser extent, payroll and
other operating costs required to support the increased sales volume at existing
service centers. Operating expenses as a percentage of net sales decreased to
17.2% in the 1997 period compared to 17.6% in the 1996 period, primarily as the
result of cost savings efforts instituted by management during 1997.
Interest and other expenses increased to $4.3 million in the year ended
December 31, 1997 from $3.1 million in the comparable 1996 period. The increase
was primarily attributable to the increase in the Company's debt as a result of
the acquisition of BLN in September 1996 and to the financing of seasonal
inventory levels for a larger number of branches in the comparable 1996 period.
The provision for income taxes increased $1.4 million, or 49.1%, to $4.3
million for 1997 compared to $2.9 million for 1996. The Company's effective tax
rate decreased to 38.0% for 1997 from 39.0% for 1996 to reflect decreases in the
Company's blended state income tax rate.
Seasonality and Quarterly Fluctuations
The Company's business is highly seasonal. In general, sales and net income
are highest during the second and third quarters, which represent the peak
months of swimming pool use and installation. Sales are substantially lower
during the first and fourth quarters, when the Company may incur net losses.
The Company experiences a build-up of inventory and accounts payable during
the first and second quarters of the year in anticipation of the peak swimming
pool supply selling season. The Company's peak borrowing occurs during the
second quarter, primarily because dated accounts payable offered by the
Company's suppliers typically are payable in April, May and June, while the
Company's peak accounts receivable collections typically occur in June, July and
August.
The principal external factor affecting the Company's business is weather.
Hot weather can increase purchases of chemicals and supplies and pool
installations. Unseasonably cool weather or 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
11
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 1998
and 1997 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.
1998 1997
----------------------------------------- ---------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- ------- -------- ------- -------
(Dollars in thousands)
Net sales.......................... $73,988 $178,450 $133,883 $71,277 $63,565 $124,790 $98,492 48,175
Gross profit....................... 15,947 41,815 30,051 14,726 13,960 28,159 21,460 9,798
Operating income (loss)............ (1,156) 20,554 10,017 (4,030) 104 11,496 6,847 (2,726)
Net sales as a percentage of
annual net sales.................. 16% 39% 29% 16% 19% 37% 29% 15%
Gross profit as a percentage of
annual gross profit............... 16% 41% 29% 14% 19% 39% 29% 13%
Operating income as a percentage
of annual operating income........ (4%) 81% 39% (16%) 1% 73% 44% (18%)
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 March 1999,
the Senior Loan Facility consisted of a term loan and a revolving line of credit
with a total borrowing capacity of $86 million, subject to a borrowing base
availability formula. Considering the Company's borrowing base and amounts
outstanding as of March 1, 1999, the Company had approximately $25.1 million
available for borrowing under the Senior Loan Facility, which amount represents
the only additional credit source currently available to the Company. The
Company's borrowings under its credit facility, together with cash flow from
operations and seller financing historically have been sufficient to support the
Company's growth and to finance acquisitions.
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 0.5% or
(ii) LIBOR plus a margin ranging from 0.75% to 2.0%, in each case depending on
the Company's leverage ratio. Substantially all of the assets of the Company,
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 and SCP Supply's abilities to pay dividends and make capital
expenditures.
As of December 31, 1998, the Company was in compliance with all such
covenants and financial ratio requirements. The Senior Loan Facility expires on
December 31, 2002. Between February 24, 1999, and March 19, 1999, the Company
purchased 198,200 shares of its Common Stock pursuant to a share repurchase
program announced in October 1998 (described below). Certain intercompany
dividends paid prior to each of the purchases by the Company
12
of Common Stock created covenant defaults under the Senior Loan Facility. The
lenders under the Senior Loan Facility have waived such defaults in accordance
with the provisions of the Senior Loan Facility.
In December 1997, the Company completed a public offering of 2,025,000
shares of Common Stock at a public offering price of $12.00 per share, resulting
in net proceeds to the Company of approximately $22.6 million. Approximately $21
million of these proceeds were used to finance the Bicknell Acquisition in
January 1998.
In connection with the BLN Acquisition, the seller of BLN provided $31.8
million of financing to the Company. This financing, which accrued interest at
6%, was paid in full at December 31, 1998.
During the year ended December 31, 1998, the Company borrowed $40.9 million
to meet seasonal working capital requirements and made payments of $40.3 million
under its revolving credit facility. Excluding acquisitions, the Company made
capital expenditures of $1,971,000, $1,105,000 and $788,000 in the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company believes that its cash flow from operations and the credit
available under its line of credit will be sufficient to finance its operations
for at least the next twelve months.
To date, the Company's acquisitions have been financed primarily by
borrowings under the Senior Loan Facility and seller notes. 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).
Share Repurchase Program
In October 1998, the Company announced that it may purchase in the open
market or directly from stockholders up to $10,000,000 of Common Stock of the
Company over a twelve-month period at prices that the Company deems appropriate.
As of March 19, 1999, the Company had purchased a total of 198,200 shares of its
Common Stock at an average price of $13.51 per share.
Year 2000 Issue
The Company utilizes and relies upon computer technology in many facets of
its operations, including its inventory and ordering information systems, the
internal and external reporting of financial and operating information and other
systems and equipment, such as telephones and security systems. The Company is
currently continuing the process it initiated in 1997 of identifying and
remediating computer systems or other equipment which will not be Year 2000
compliant when handling date-related data beyond the twentieth century.
State of Readiness - The Company's core accounting and information systems
are based on consecutively numbered days, and not the "month-date-year" format
which is more vulnerable to Year 2000 problems. The Company's hardware and
software system vendors have assured the Company that its systems are able to
correctly function beyond 1999 when handling date-related data. To verify the
assurances of third-party hardware and software vendors regarding Year 2000
issues, the Company has been testing its hardware and software under a testing
program. A portion of the testing program was conducted during the fourth
quarter of 1998, and as a result of those tests the Company did not identify any
areas of Year 2000 noncompliance. The Company will be working with consultants
during the first quarter of 1999 to develop additional testing procedures, and
the Company will perform such procedures during the first and second quarter of
1999. The Company will work to remediate any Year 2000 noncompliance as such
noncompliance is identified as a result of the testing program. The Company is
near completion of the process of collecting information from each of its
service centers regarding all other devices, such as personal computers,
telephones, security systems, and office and warehouse equipment which may have
"embedded" microprocessors utilizing date information. The assessment, testing
and any necessary remediation of such equipment is expected to be complete by
June 1999. If the assessment, testing and remediation steps described above are
not accomplished in a timely manner, the Year 2000 issue could have a material
impact on the Company's operations.
13
The Company is communicating with its major suppliers and service providers
and certain large customers regarding their compliance with Year 2000
requirements. The Company has sent out questionnaires to certain suppliers and
service providers to identify potential problems and assess the compliance
efforts undertaken by these parties. The Company has received responses from a
majority of such parties. Since most of the responses indicated that efforts to
comply with Year 2000 requirements are ongoing, further communications with the
Company's major suppliers and service providers will be needed. There can be no
guarantee that the systems of third parties will be made compliant in a timely
manner and would not have an adverse effect on the Company.
Costs to Address the Year 2000 Issue - In 1997, the Company upgraded the
hardware and software of its core accounting and information systems for a total
cost of $1.5 million. The Company believes this cost was, for the most part, not
directly related to Year 2000 issues, but rather, the new systems were needed in
the normal course due to the growth the Company has experienced. The Company
recently incurred costs of $300,000 to upgrade certain data communications
equipment. The Company believes that this data communications upgrade would have
been required in the normal course, but the Company accelerated the timing of
this upgrade in part to improve its Year 2000 readiness. Because it is still in
the assessment phase in some areas, the Company does not yet have an estimate on
its Year 2000 assessment, testing and remediation costs for all systems and
equipment, but based on current information the Company believes that such costs
are not likely to have a material adverse effect on the Company's business,
financial condition or operating results. Management anticipates funding the
costs to address the Year 2000 issue with cash generated from operations and
from borrowing capacity under the Senior Loan Facility.
Risks Presented by the Year 2000 Issue - There may be unanticipated delays
in completing the Company's planned Year 2000 assessment and remediation and, as
the process of inventorying the systems proceeds, the Company may identify
additional systems that present a Year 2000 risk. In addition, if any third
parties who provide goods or services essential to the Company's business
activities fail to appropriately address their Year 2000 issues, such failure
could have a material adverse effect on the Company's business, financial
condition, or operating results. For example, a Year 2000 related disruption on
the part of the financial institutions which process the Company's transactions
could have a material adverse effect on the Company's business, financial
condition or operating results.
Contingency Plans - The Company's Year 2000 initiative includes the
development of contingency plans to address failures of significant portions of
the Company's systems or failures by third parties who provide goods or services
essential to the Company's business to address their Year 2000 issues. The
Company will be working with consultants to develop such plans and expect to
conclude the development of these contingency plans by the end of the second
quarter of 1999.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks, including interest rate risk and
foreign currency risk. The adverse effects of potential changes in these market
risks are discussed below. The following discussion does not consider the
effects of the reduced level of overall economic activity that could exist
following such changes. Further, in the event of changes of such magnitude,
management would likely take actions to mitigate its exposure to such changes.
The Company has not used derivative instruments to engage in speculative
transactions or hedging activities.
Interest Rate Risk
As a result of the variable interest rates on the Senior Revolving Note and
Senior Term Note under the Senior Loan Facility, the Company's earnings are
exposed to changes in short-term interest rates. If (i) the variable rates on
the Company's Senior Loan Facility were to increase by 1% from the rate at
December 31, 1998; (ii) the Company borrowed the maximum amount available under
its revolving line of credit ($65.0 million) for all of 1999, and (iii) the
Company made all required payments of principal ($5 million) in 1999, solely as
a result of the increase in interest rates, then the Company's interest expense
would increase, resulting in a $296,000 decrease in net income, assuming an
effective tax rate of 37%. The fair value of the Company's Senior Revolving
Note and Senior Term Note is not affected by changes in market interest rates.
14
Foreign Exchange Risk
The Company has a subsidiary located in the United Kingdom for which the
functional currency is the British Pound. The Company typically does not hedge
its foreign currency exposure. Historically, fluctuations in British Pound/U.S.
dollar exchange rates have not had a material effect on the Company. Future
changes in the exchange rate of the U.S. dollar to the British pound may
positively or negatively impact the Company's revenues, operating expenses and
earnings; however, due to the size of its operations in the United Kingdom, the
Company does not anticipate its exposure to foreign currency rate fluctuations
to be material in 1999.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995
With the exception of historical matters, the matters discussed in this
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; (viii) Year 2000 issues; and (ix)
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.
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 1999 Proxy Statement to be
filed with the Commission.
Item 11. Executive Compensation.
- -------- -----------------------
Incorporated by reference to the Company's 1999 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 1999 Proxy Statement to be
filed with the Commission.
15
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
Incorporated by reference to the Company's 1999 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.
None.
16
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 25, 1999.
SCP POOL CORPORATION
By: /S/ WILSON B. SEXTON
--------------------------
Wilson B. Sexton, Chairman, Chief
Executive Officer and Director
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 25, 1999.
Signature Title
--------- -------
/S/ WILSON B. SEXTON Chairman, Chief Executive Officer and Director
Wilson B. Sexton
/S/ MANUEL J. PEREZ DE LA MESA President and Chief Operating Officer
Manuel J. Perez de la Mesa
/S/ CRAIG K. HUBBARD Chief Financial Officer, Treasurer and Secretary
Craig K. Hubbard
/S/ ANDREW W. CODE Director
Andrew W. Code
/S/ JAMES J. GAFFNEY Director
James J. Gaffney
/S/ PETER M. GOTSCH Director
Peter M. Gotsch
/S/ FRANK J. ST. ROMAIN Director
Frank J. St. Romain
/S/ ROBERT C. SLEDD Director
Robert C. Sledd
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of SCP Pool Corporation
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets - December 31, 1998 and 1997.................... F-3
Consolidated Statements of Income - Years Ended December 31, 1998, 1997
and 1996................................................................... F-4
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1998, 1997 and 1996........................................................ F-5
Consolidated Statements of Cash Flows - Years Ended December 31,
1998, 1997 and 1996........................................................ 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, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
New Orleans, Louisiana
February 19, 1999, except for the
fourth paragraph of Note 3, as to
which the date is March 25, 1999
F-2
SCP Pool Corporation
Consolidated Balance Sheets
(In thousands, except share data)
December 31
1998 1997
---------------------
Assets
Current assets:
Cash and cash equivalents $ 4,911 $ 22,296
Receivables 34,609 24,775
Inventory 69,377 48,261
Prepaid expenses 1,673 562
Deferred income taxes 1,600 580
---------------------
Total current assets 112,170 96,474
Property and equipment, net 5,435 4,792
Goodwill, net 43,940 32,614
Other assets, net 2,243 2,572
---------------------
Total assets $163,788 $136,452
=====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 34,589 $ 20,266
Accrued expenses and other current liabilities 10,909 6,078
Current portion of long-term debt 5,000 6,743
---------------------
Total current liabilities 50,498 33,087
Deferred income taxes 4,030 3,584
Long-term debt, less current portion 28,696 33,146
Stockholders' equity:
Preferred stock, $.01 par value; 100,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value; 20,000,000 shares
authorized; 11,639,434 and 11,610,071 shares
issued and outstanding at December 31, 1998 and 12 12
1997, respectively
Additional paid-in capital 52,516 52,348
Retained earnings 28,013 14,275
Accumulated other comprehensive income 23 -
---------------------
Total stockholders' equity 80,564 66,635
---------------------
Total liabilities and stockholders' equity $163,788 $136,452
=====================
See accompanying notes.
F-3
SCP Pool Corporation
Consolidated Statements of Income
(In thousands, except per share data)
Year ended December 31
1998 1997 1996
-------------------------------------
Net sales $457,598 $335,022 $235,844
Cost of sales 355,059 261,645 183,814
-------------------------------------
Gross profit 102,539 73,377 52,030
Warehouse expense 20,593 14,416 9,611
Selling and administrative expenses 55,459 42,355 31,139
Goodwill amortization 1,102 885 793
-------------------------------------
Operating income 25,385 15,721 10,487
Other income (expense):
Interest expense (3,480) (4,482) (3,176)
Amortization expense (848) (708) (698)
Miscellaneous income, net 724 852 823
-------------------------------------
(3,604) (4,338) (3,051)
-------------------------------------
Income before income taxes 21,781 11,383 7,436
Income taxes 8,043 4,327 2,903
-------------------------------------
Net income $ 13,738 $ 7,056 $ 4,533
=====================================
Income per share of common stock:
Basic $ 1.18 $ .73 $ .48
=====================================
Diluted $ 1.15 $ .71 $ .46
=====================================
Weighted average shares outstanding:
Basic 11,626 9,628 9,501
=====================================
Diluted 11,911 9,887 9,765
=====================================
See accompanying notes.
F-4
SCP Pool Corporation
Consolidated Statements of Stockholders' Equity
(In thousands)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Total
-----------------------------------------------------------------------
Balance at January 1, 1996 9,501 $ 9 $29,582 $ 2,686 $ - $32,277
Net income - - - 4,533 - 4,533
-----------------------------------------------------------------------
Balance at December 31, 1996 9,501 9 29,582 7,219 - 36,810
Common stock issued 2,025 3 22,555 - - 22,558
Exercise of stock option 41 - 182 - - 182
Conversion of convertible debt 43 - 29 - - 29
Net income - - - 7,056 - 7,056
-----------------------------------------------------------------------
Balance at December 31, 1997 11,610 12 52,348 14,275 - 66,635
Net income - - - 13,738 - 13,738
Foreign currency translation adjustment,
net of income taxes of $14 - - - - 23 23
-------
Comprehensive income 13,761
-------
Exercise of stock options 29 - 168 - - 168
-----------------------------------------------------------------------
Balance at December 31, 1998 11,639 $12 $52,516 $28,013 $ 23 $80,564
=======================================================================
See accompanying notes.
F-5
SCP Pool Corporation
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31
1998 1997 1996
---------------------------------------------
Operating activities
Net income $ 13,738 $ 7,056 $ 4,533
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,285 2,553 2,503
Provision for doubtful accounts receivable, net of write-offs 247 544 388
Provision for inventory obsolescence, net of write-offs 730 447 (86)
Provision for deferred income taxes (574) 1,277 1,029
Loss (gain) on sale of property and equipment 222 (28) 155
Changes in operating assets and liabilities, net of effects of
acquisitions and disposals:
Accounts receivable (1,321) (26) (12,571)
Inventory (8,813) (7,086) 4,877
Prepaid expenses and other assets (1,420) (437) 31
Accounts payable 10,454 5,115 2,638
Accrued expenses and other current liabilities 2,852 (2,143) 4,129
---------------------------------------------
Net cash provided by operating activities 19,400 7,272 7,626
Investing activities
Acquisition of businesses, net of cash acquired (29,676) - (1,664)
Purchase of property and equipment (1,971) (1,105) (788)
Proceeds from sale of property and equipment 864 127 73
---------------------------------------------
Net cash used in investing activities (30,783) (978) (2,379)
Financing activities
Net borrowings (repayments) of revolving loan 550 4,050 (1,000)
Payments on long-term debt (6,743) (15,409) (1,669)
Issuance of common stock 168 22,740 -
---------------------------------------------
Net cash provided by (used in) financing activities (6,025) 11,381 (2,669)
---------------------------------------------
Effect of exchange rate changes on cash 23 - -
Change in cash and cash equivalents (17,385) 17,675 2,578
Cash and cash equivalents at beginning of year 22,296 4,621 2,043
---------------------------------------------
Cash and cash equivalents at end of year $ 4,911 $ 22,296 $ 4,621
=============================================
Supplemental cash flow information
Cash paid (received) during the year for:
Interest $ 3,416 $ 4,424 $ 3,279
=============================================
Income taxes, net of refunds $ 9,505 $ 4,508 $ (561)
=============================================
Supplemental disclosure of noncash investing and financing
activities
Long-term debt issued to acquire businesses $ - $ - $ 31,846
=============================================
Long-term debt reduced through sale of business $ - $ - $ 4,376
=============================================
See accompanying notes.
F-6
SCP Pool Corporation
Notes to Consolidated Financial Statements
December 31, 1998
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), after giving affect to the January 1999 acquisitions discussed
below, maintain 100 service centers in 34 states and two in the United Kingdom,
from which they sell swimming pool equipment and supplies to pool builders,
retail stores, and service firms.
In September 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 $2.7 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. In connection
with this acquisition, the Company recorded goodwill of $4.7 million.
Unaudited pro forma results of operations of the Company for the year ended
December 31, 1996, giving effect to the BLN acquisition as if it had occurred as
of January 1, 1996, are as follows (in thousands, except per share data):
1996
--------
Net sales $364,702
Gross profit $ 74,388
Operating income $ 10,095
Income before income taxes $ 3,098
Net income $ 3,098
Net income per share:
Basic $ .33
Diluted $ .32
The unaudited pro forma consolidated results of operations for the year ended
December 31, 1996 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. They do not reflect
the anticipated savings in purchasing costs at BLN during the periods presented,
nor do they reflect cost savings from the closure of certain BLN service
centers.
F-7
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
In January 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Bicknell Huston Distributors, Inc. ("Bicknell"),
which distributed swimming pool supplies and related products through its eleven
service centers in six northeastern states, for a purchase price of
approximately $22.7 million, which was paid in cash. This acquisition was
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 the acquisition. In connection with this
acquisition, the Company recorded goodwill of $6.1 million.
In August 1998, the Company acquired the capital stock of Nor-Cal Ltd., which
distributes swimming pool supplies and related products through its service
center in Crawley, England, for a purchase price of $8.5 million, which was paid
in cash. This acquisition was 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 the acquisition. The
purchase price was allocated to the net assets and liabilities based on fair
value (assets of $5.1 million and liabilities of $2.9 million). In connection
with this acquisition, the Company recorded goodwill of $6.3 million.
Unaudited pro forma results of operations of the Company for the years ended
December 31, 1998 and 1997, giving effect to the Bicknell and Nor-Cal
acquisitions as if they had occurred as of January 1, 1997, are as follows (in
thousands, except per share data):
1998 1997
---------------------
Net sales $463,432 $398,171
Gross profit $104,544 $ 88,682
Operating income $ 26,141 $ 20,014
Income before income taxes $ 22,308 $ 12,381
Net income $ 14,070 $ 7,675
Net income per share:
Basic $ 1.21 $ 0.66
Diluted $ 1.18 $ 0.64
F-8
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, 1998 and 1997 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 acquisitions. They do not
reflect the anticipated savings in purchasing costs at Bicknell and Nor-Cal
during the periods presented.
In January 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of Benson Pump Co., which distributed swimming pool
supplies and related products through its 20 service centers in 16 central and
western states. Also in January 1999, the Company acquired the capital stock of
Pratts Plastics Limited, which distributes swimming pool supplies through its
service center in Essex, England under the trade name "The Swimming Pool
Warehouse." The Benson Pump purchase price was approximately $21.6 million,
which was paid in cash and The Swimming Pool Warehouse purchase price was
$475,000, which was paid in cash. These acquisitions have been accounted for
using the purchase method of accounting.
Principles of Consolidation
The consolidated financial statements include the accounts of SCP Pool
Corporation 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-9
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Financial Instruments
The Company's carrying value of cash, trade receivables, accounts payable, and
accrued liabilities approximates fair value due to the short maturity of those
instruments. The carrying amount of long-term debt approximates fair value
because it bears interest at variable rates.
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
provided. Credit losses have been within management's expectations.
Inventory
Inventory consists primarily of goods purchased for resale and are carried at
the lower of cost, using the average cost method, or market. At December 31,
1998 and 1997, the reserve for inventory obsolescence was approximately
$3,008,000 and $2,161,000, 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 inventory
management 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 $1,335,000, $990,000, and $1,012,000 in 1998, 1997,
and 1996, respectively.
F-10
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized over 40 years. At December 31, 1998 and 1997,
accumulated amortization was approximately $4,196,000 and $3,096,000,
respectively. The recoverability of goodwill is assessed periodically and takes
into account whether the goodwill should be completely 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. 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.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." The
SOP is effective beginning on January 1, 1999, and requires that start-up costs
capitalized prior to that date be written-off and any future start-up costs be
expensed as incurred. The unamortized balance of start-up costs of $863,000, net
of $319,000 tax benefit, will be written off as the cumulative effect of an
accounting change as of January 1, 1999.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components. Under Statement 130, foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, are to be included in other comprehensive income. Since the Company had
no such foreign currency translation
F-11
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
adjustments in years prior to 1998, the adoption of Statement 130 had no affect
on prior year financial statements.
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.
Stock Compensation Arrangements
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees."
Revenue Recognition
The Company recognizes revenue when products are shipped.
F-12
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
2. Details of Certain Balance Sheet Accounts
Additional information regarding certain balance sheet accounts is presented
below (in thousands):
December 31
1998 1997
------------------------
Receivables:
Trade accounts, less allowance of $2,397
in 1998 and $1,938 in 1997 $28,068 $19,300
Vendor rebates 5,374 4,274
Income tax receivable 446 -
Other 721 1,201
------------------------
$34,609 $24,775
========================
Property and equipment:
Land $ 185 $ 429
Building 432 1,001
Autos and trucks 287 156
Machinery and equipment 2,465 1,485
Furniture and fixtures 4,082 3,434
Leasehold improvements 1,282 508
------------------------
8,733 7,013
Less accumulated depreciation 3,298 2,221
------------------------
$ 5,435 $ 4,792
========================
Other assets:
Loan financing fees $ 2,539 $ 2,453
Noncompete agreement - 500
Organization costs 1,717 1,366
Other 356 282
------------------------
4,612 4,601
Less accumulated amortization 2,369 2,029
------------------------
$ 2,243 $ 2,572
========================
Accrued expenses and other current
liabilities:
Salaries, bonuses, and commissions $ 6,975 $ 2,880
Income taxes payable - 310
Other 3,934 2,888
------------------------
$10,909 $ 6,078
========================
F-13
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
3. Debt
The components of the Company's debt were as follows (in thousands):
December 31
1998 1997
------------------------
Senior Revolving Note, variable rate
(effective interest rate of 7.75% at December
31, 1998), due in 2002 $16,600 $16,050
Senior Term Note, variable rate (effective
interest rate of 5.8% at December 31, 1998),
payable in quarterly installments of variable
amounts through 2002 17,000 21,000
Promissory Notes to BLN, interest rate of 6%,
paid in 1998 - 1,859
8% Subordinated Notes, paid in 1998 - 884
10% Convertible Notes, due in 2002 96 96
------------------------
33,696 39,889
Less current portion 5,000 6,743
------------------------
$28,696 $33,146
========================
Maturities of long-term debt for the five succeeding years are $5,000,000 in
1999, $5,000,000 in 2000, $5,000,000 in 2001, and $18,696,000 in 2002.
The Company's credit agreement includes, among other things, covenants which
require the Company to maintain minimum levels of interest coverage and fixed
charge coverage and restrict the ability of the Company and its subsidiaries to
pay dividends and make capital expenditures. As of December 31, 1998, the
Company was in compliance with all such covenants and financial ratio
requirements. The Senior Loan Facility expires on December 31, 2002.
Between February 24, 1999 and March 19, 1999, the Company purchased 198,200
shares of its Common Stock pursuant to a share repurchase program announced in
October 1998. Certain intercompany dividends paid prior to each of the purchases
by the Company created a covenant default under the Senior Loan Facility. On
March 25, 1999, the lenders under the Senior Loan Facility waived such defaults.
Substantially all of the assets of the Company are pledged as collateral for the
Senior Revolving Note and the Senior Term Note. Available credit under the
Senior Revolving Note, considering amounts currently outstanding, was
approximately $48.4 million, subject to an accounts receivable and inventory
borrowing base limit. At December 31,
F-14
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
3. Debt (continued)
1998, the unused available credit under the Senior Revolving Note was
approximately $30 million. The Company pays a quarterly commitment fee of .25%
per annum of the unused portion of available credit under the Senior Revolving
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 $.98 per
share. At December 31, 1998, the conversion of these notes would result in the
issuance of 147,249 shares of the Company's common stock. Such shares have been
reserved by the Company.
4. Income Taxes
Significant components of the Company's deferred tax liabilities and assets were
as follows (in thousands):
December 31
1998 1997
--------------------
Deferred tax liabilities:
Goodwill $3,853 $3,544
Trade discounts on purchases 106 157
Prepaid expenses 244 205
Other 919 906
--------------------
Total deferred tax liabilities 5,122 4,812
Deferred tax assets:
Inventory 1,432 764
Allowance for doubtful accounts 1,023 736
Other 237 308
--------------------
Total deferred tax assets 2,692 1,808
--------------------
Net deferred tax liabilities $2,430 $3,004
====================
F-15
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
Significant components of income taxes were as follows (in thousands):
December 31
1998 1997 1996
-------------------------------
Current:
Federal $7,917 $2,644 $1,634
Other, primarily state 700 406 240
-------------------------------
8,617 3,050 1,874
Deferred:
Federal (513) 1,142 898
Other, primarily state (61) 135 131
-------------------------------
(574) 1,277 1,029
-------------------------------
Total $8,043 $4,327 $2,903
===============================
The reconciliation of income taxes computed at the federal statutory rates to
income taxes was (in thousands):
December 31
1998 1997 1996
------------------------------
Tax at statutory rates $7,623 $3,884 $2,528
Other, primarily state income taxes 420 443 375
------------------------------
Total $8,043 $4,327 $2,903
==============================
5. Common Stock and Earnings Per Share
In July 1998, the board of directors declared a three-for-two stock split of the
Company's common stock, which was paid in the form of a stock distribution on
July 24, 1998 to the stockholders of record at the close of business on July 13,
1998. Accordingly, shares, per-share data and related capital amounts for all
periods presented reflect the effects of this split.
In accordance with FAS 128, the Company has presented basic earnings per share,
computed on the basis of the weighted average number of shares outstanding
during the period, and diluted earnings per share, computed on the basis of the
weighted average number of shares and all dilutive potential shares outstanding
during the year. A
F-16
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
5. Common Stock and Earnings Per Share (continued)
reconciliation between basic and diluted weighted average number of shares
outstanding and the related earnings per share calculation is presented below
for each of the years ended December 31:
1998 1997 1996
-----------------------------
Numerator:
Net income $13,738 $7,056 $4,533
Adjustment for interest expense, net of
tax, on convertible notes 8 8 8
-----------------------------
Numerator for diluted earnings per share $13,746 $7,064 $4,541
=============================
Denominator:
Denominator for basic earnings per
share--weighted-average shares 11,626 9,627 9,501
Effect of dilutive securities:
Stock options 138 93 72
Convertible notes 147 166 192
-----------------------------
Denominator for diluted earnings per share 11,911 9,886 9,765
=============================
Basic earnings per share $ 1.18 $ .73 $ .48
=============================
Diluted earnings per share $ 1.15 $ .71 $ .47
=============================
F-17
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
6. Commitments and Contingencies
The Company leases facilities for its service centers, corporate office and
vehicles under noncancelable operating leases that expire in various years
through 2007 but which have options to extend for various terms. Rental expense
under such operating leases was approximately $10,563,000 in 1998, $7,747,000 in
1997, and $4,815,000 in 1996. The future minimum lease payments as of December
31, 1998 related to noncancelable operating leases with initial terms of one
year or more are set forth below (in thousands):
1999 $ 7,798
2000 6,080
2001 4,218
2002 3,084
2003 2,452
Thereafter 2,145
-------
$25,777
=======
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 closing of 15 acquired
facilities. During 1997, the Company recorded an additional increase of
approximately $333,000 to goodwill for expected additional lease buyouts and
occupancy costs related to these acquired facilities. As of December 31, 1998,
the Company has closed all of the above-mentioned facilities, having paid
$1,203,000 of such liabilities, and has a remaining accrual of approximately
$330,000 to settle the remaining leases.
In connection with the acquisitions of BLN and Bicknell, the Company entered
into certain vendor supply agreements which require the Company to purchase a
certain percentage of its annual requirements for certain products at prices
defined by the supply agreements. These supply agreements have initial terms
which expire in September 2001 and December 2005, respectively, with an
indefinite number of three-year renewal periods until terminated by either
party.
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 coverage at
levels generally consistent with industry standards to insure itself against the
normal risks of operations.
F-18
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
7. 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 income
securities based on employee elections. Matching contributions and profit-
sharing contributions made by the Company were $272,000 and $1,100,000,
respectively, in 1998, $197,000 and $934,000 respectively, in 1997, and $113,000
and $650,000 respectively, in 1996.
8. Stock Option Plans
The 1995 Stock Option Plan authorizes the board of directors 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
granted under this plan is limited to an aggregate amount of 900,000. 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 December 31, 2003. In May 1998, the 1995 Stock
Option Plan was suspended. This action had no effect on options granted prior
to the suspension.
In May 1998, the shareholders approved the 1998 Stock Option Plan, which
authorizes the Board of Directors to grant, at its discretion, options to
purchase shares of common stock, stock appreciation rights, restricted stock and
performance awards to employees, agents, consultants or independent contractors
of the Company. The number of shares authorized for issuance under this plan is
limited to an aggregate amount of 1,125,000. 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 or more years after the date of grant and
expire ten years after the date of grant. No options were granted under the 1998
Stock Option Plan during 1998.
The SCP Pool Corporation Non-Employee Directors Equity Incentive Plan permits
the board of directors to grant to each non-employee director options to
purchase shares of the Company's common stock. The number of shares granted
under this plan is limited to an aggregate amount of 450,000. The options will
have an exercise 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.
F-19
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
In March 1998, the Company's board of directors adopted the SCP Pool Corporation
Employee Stock Purchase Plan. Under the plan, eligible employees may be granted
rights to purchase up to an aggregate of 900,000 shares of common stock
annually. Rights are exercisable at 85% of the applicable market value provided
that this value is greater than book value per share. If 85% of the applicable
market value is less than book value per share, rights are exercisable at book
value per share. Rights are exercisable at the applicable market value if the
applicable market value is less than book value per share. The applicable market
value, as defined, is the lower of either the beginning of the plan year or the
end of the plan year quoted market price of the Company's stock. Book value per
share is determined as of the most recent audited consolidated balance sheet
date. No shares were issued in 1998 under this plan.
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:
1998 1997 1996
-------------------------------------
Risk-free interest rate 4.71% 6.2% 6.7%
Expected dividend yield - - -
Expected volatility .29 .38 .32
Weighted average expected life 4.1 years 4.1 years 3.4 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 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.
F-20
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. As the Company accounts
for stock compensation under APB 25, no compensation cost has been recognized
for its stock options in the financial statements. 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):
1998 1997 1996
-------------------------------
Pro forma net income $13,193 $6,632 $4,392
Pro forma earnings per share:
Basic $ 1.13 $ .69 $ .46
Diluted $ 1.11 $ .67 $ .45
A summary of the Company's stock option activity and related information for the
plans described above is as follows:
1998 1997 1996
-----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-----------------------------------------------------------------
Outstanding--Beginning of year 439,542 $ 7.38 253,202 $4.55 70,389 $2.29
Granted 178,500 13.50 226,125 9.25 182,813 5.42
Exercised 26,011 4.68 39,785 2.29 - -
Forfeitures 11,280 9.85 - - - -
-------- -------- --------
Outstanding--End of year 580,751 $ 9.92 439,542 $7.38 253,202 $4.55
======== ======== ========
Exercisable at end of year 352,376 $ 7.38 210,605 $6.18 67,500 $5.00
======== ======== ========
Weighted average fair value of
options granted during the year $ 4.21 $ 3.63 $ 1.61
======== ======== ========
Exercise prices for options outstanding as of December 31, 1998 ranged from
$2.29 to $13.50, and had a weighted average remaining contractual life of 4.9
years.
F-21
SCP Pool Corporation
Notes to Consolidated Financial Statements (continued)
9. Quarterly Financial Data (Unaudited)
The following is a tabulation of the Company's unaudited quarterly results of
operations for the years ended December 31, 1998 and 1997 (in thousands, except
per share data):
Quarter Ended
3/98 6/98 9/98 12/98 3/97 6/97 9/97 12/97
--------------------------------------------------------------------------------------
Net sales $73,988 $178,450 $133,883 $71,277 $63,565 $124,790 $98,492 $48,175
Gross profit 15,947 41,815 30,051 14,726 13,960 28,159 21,460 9,798
Net income (loss) (1,180) 12,233 5,820 (3,135) (603) 6,394 3,471 (2,206)
Net income (loss)
per share:
Basic $ (.10) $ 1.05 $ .50 $ (.27) $ (.06) $ .67 $ .36 $ (.22)
Diluted (.10) 1.03 .49 (.27) (.06) .65 .35 (.22)
As a result of differences in the way in-the-money stock options are considered
from quarter-to-quarter under the requirements of FAS 128, diluted EPS for
annual periods may not equal the sum of the individual quarter's diluted EPS
amount.
F-22
Sequential
Exhibit Page
Number Document Description Number
- ------------------------------------------------------------------------------------------------ ----------
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Restated Bylaws of the Company. (2)
4.1 Form of certificate representing shares of Common Stock of the Company. (2)
4.2 Credit Agreement, dated as of December 31, 1993, by and among South Central Pool (2)
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.
4.3 Amendment No. 1 to Credit Agreement, dated as of September 1, 1994, by and among (2)
South Central Pool Supply, Inc. ("SCP Supply"), The First National Bank of Chicago,
as agent, and various lenders from time to time party thereto.
4.4 Amendment No. 2 to Credit Agreement, dated as of January 20, 1995, by and among (2)
SCP Supply, The First National Bank of Chicago, as agent, and various lenders from
time to time party thereto.
4.5 Amendment No. 3 to Credit Agreement, dated as of February 28, 1995, by and among (2)
South Central Pool Supply, Inc., The First National Bank of Chicago, as agent, and
various lenders from time to time party thereto.
10.1 Asset Purchase Agreement, dated as of December 31, 1993, by and among the (2)
Company, SCP Acquisition Corp., and South Central Pool Supply, Inc.
10.2 Registration Agreement, dated as of December 31, 1993, by and among the Company, (2)
CHS, various management and outside investors, Berkeley Atlantic Income Limited,
BG Services Limited, and PNC Equity Management Corp.
10.3 Asset Purchase Agreement, dated as of January 4, 1994, by and between Aqua Fab (2)
Industries, Inc. and South Central Pool Supply, Inc.
10.4 Amendment No. 1 to Asset Purchase Agreement, dated as of January 7, 1994, by and (2)
among Aqua Fab Industries, Inc. and South Central Pool Supply Industries, Inc.
10.5 Amendment No. 2 to Asset Purchase Agreement, dated as of January 18, 1994, by and (2)
among Aqua Fab Industries, Inc. and South Central Pool Supply, Inc.
10.6 Amendment No. 3 to Asset Purchase Agreement, dated as of February 17, 1994, by and (2)
among Aqua Fab Industries, Inc. and South Central Pool Supply, Inc.
10.7 Asset Purchase Agreement, dated as of January 20, 1995, by and among Alliance (2)
Packaging, Inc., York Chemical Corporation and Wexco Incorporated.
10.8 Stock Purchase Agreement, dated as of February 15, 1995, by and among the Company, (2)
Orcal Pool Supplies, Inc. and Ronald Hetzner.
10.9 Agreement, dated as of March 31, 1992, by and between Wexco and W.B. Sexton. (2)
10.10 Patent Assignment, dated as of January 20, 1995, between Wexco Incorporated and (2)
Alliance Packaging, Inc.
10.11 Management Agreement, dated as of December 31, 1993, by and between CHS (2)
Management Limited Partnership, an Illinois limited partnership, and SCP Acquisition
Corp.
10.12 Management Agreement, dated as of February 28, 1995, by and between SCP Supply (2)
and Ronald Hetzner.
10.13 SCP Pool Corporation 1995 Stock Option Plan.* (2)
10.14 Form of Individual Stock Option Agreement.* (2)
10.15 Form of Convertible Subordinated Note dated as of December 31, 1993 issued by SCP (2)
Holding Corp.
10.16 Form of Junior Subordinated Note, dated as of December 31, 1993, issued by SCP (2)
Holding Corp.
Sequential
Exhibit Page
Number Document Description Number
- -------- -------------------- ----------
10.17 Form of Executive Securities Agreement, dated as of December 31, 1993, among SCP (2)
Holding Corp., Code Hennessy & Simmons Limited Partnership and certain executives.
10.18 Form of Lease, dated as of February 28, 1995, by and between Ronald Hetzner and (2)
South Central Pool Supply, Inc.
10.19 Lease, dated as of November 8, 1993, by and between Northpark Alliance, LLC and (2)
South Central Pool Supply, Inc.
10.20 Lease, dated as of November 7, 1991, by and between St. Romain Children's Trust and (2)
South Central Pool Supply, Inc.
+10.21 Sales Agreement, dated as of October 1, 1993, between PPG Industries, Inc. and SCP (2)
Supply.
10.22 Asset Purchase Agreement, dated as of September 7, 1995, by and among SCP Supply, (3)
Aman Enterprises, Inc., Stephen Aman and Walter Aman.
10.23 Stock Purchase Agreement, dated as of November 10, 1995, by and among SCP (3)
Supply, Steven Portnoff Corporation and Steven Portnoff
10.24 Asset Purchase Agreement, dated as of December 12, 1995, by and among SCP Supply, (3)
Pool Mart of Nevada, Inc., Robert Portnoff, Sarah Portnoff and Steven Portnoff
10.25 SCP Pool Corporation 1996 Non-Employee Director Equity Incentive Plan* (3)
10.26 Second Amended and Restated Credit Agreement, dated as of September 26, 1996, (4)
among South Central Pool Supply, Inc., the First National Bank of Chicago and the
Institutions party thereto as lenders
10.27 Asset Purchase Agreement, dated as of September 26, 1996, among South Central Pool (4)
Supply, Inc., SCP Pool Corporation, The B-L Network, Inc. and Bio-Lab, Inc.
10.28 Asset Purchase Agreement, dated as of September 26, 1996, among Alliance (4)
Packaging, Inc., SCP Pool Corporation, South Central Pool Supply, Inc. and Bio-Lab,
Inc.
+ 10.29 Supply Agreement, among Bio-Lab, Inc., South Central Pool Supply, Inc., and SCP (4)
Pool Corporation
+ 10.30 Supply Agreement, dated as of September 26, 1996, among Bio-Lab, Inc., South (4)
Central Pool Supply, Inc., and SCP Pool Corporation
++10.31 Asset Purchase Agreement, dated as of November 13, 1997, among SCP Pool (5)
Corporation, South Central Pool Supply, Inc., Bicknell Huston Distributors, Inc.,
Pacific Industries, Inc. and Cookson America, Inc.
10.32 Third Amended and Restated Credit Agreement, dated as of December 31, 1997, by and (6)
among South Central Pool Supply, Inc., the institutions from time to time party thereto
as lenders, LaSalle National Bank, as Agent and Co-Arranger and Hibernia National
Bank as Co-Arranger.
10.33 Amendment, dated December 31, 1997, to the Asset Purchase Agreement, dated as of (6)
November 13, 1997, among SCP Pool Corporation, South Central Pool Supply, Inc.,
Bicknell Huston Distributors, Inc., Pacific Industries, Inc. and Cookson America, Inc.
10.34 SCP Pool Corporation 1998 Stock Option Plan* (1)
10.35 Form of Stock Option Agreement under 1998 Stock Option Plan*
10.36 SCP Pool Corporation Employee Stock Purchase Plan* (1)
10.37 Amendment No. 1 to SCP Pool Corporation Employee Stock Purchase Plan*
10.38 Asset Purchase Agreement, dated as of January 8, 1999, among South Central Pool
Supply, Inc., Benson Pump Co., Benson Pump-Georgia, Inc., and J.K.K.T. Corp.
Sequential
Exhibit Page
Number Document Description Number
- ------ -------------------- ----------
10.39 Employment Agreement, dated January 25, 1999, among SCP Pool Corporation, South
Central Pool Supply, Inc. and Manuel J. Perez de la Mesa*
21.1 Subsidiaries of the registrant. (6)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
____________
+ Confidential Treatment Granted.
++ Confidential Treatment Granted for portions of Exhibit C to this Agreement.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to the Company's
Definitive Proxy Statement on Schedule 14A, filed April 8, 1998.
(2) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-92738.
(3) 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.
(4) Incorporated by reference to the respective exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996.
(5) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 333-40245.
(6) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.