SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission File No. 000-26991
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ANTHONY & SYLVAN POOLS CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-1522456
(State of Incorporation) (I.R.S. Employer Identification No.)
6690 Beta Drive, Mayfield Village, Ohio 44143
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(440) 720-3301
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (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 (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by checkmark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of issuer's classes
of common shares, as of the latest practical date.
Class Outstanding at October 23, 2003
--------------------------- -------------------------------
Common Shares, no par value 5,341,931 Shares
ANTHONY AND SYLVAN POOLS CORPORATION
FORM 10-Q
Index
Begins on
Page
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PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2003 (unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of
Operations - Three months and nine months ended
September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash
Flows - Nine months ended September 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about Market
Risk 13
Item 4. Controls and Procedures 13
PART II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
2003 2002
------------- -------------
(unaudited) (audited)
Assets
Current Assets:
Cash and cash equivalents $ 10,010 $ 432
Contract receivables, net 7,686 8,354
Inventories 6,091 5,841
Prepayments and other 3,340 3,655
Deferred income taxes 2,510 1,936
------------- -------------
Total current assets 29,637 20,218
Property, plant and equipment, net 6,450 7,794
Goodwill, net 26,276 26,276
Deferred income taxes -- 373
Other 2,841 2,951
------------- -------------
Total assets $ 65,204 $ 57,612
============= =============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 9,995 $ 4,310
Accrued expenses 16,155 11,149
Net liabilities of discontinued operations 758 1,169
Accrued income taxes 1,330 14
------------- -------------
Total current liabilities 28,238 16,642
Long-term debt -- 6,300
Other long-term liabilities 3,525 3,526
Commitments and contingencies -- --
Shareholders' equity 33,441 31,144
------------- -------------
Total liabilities and shareholders' equity $ 65,204 $ 57,612
============= =============
See notes to unaudited condensed consolidated financial statements.
3
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2003 and 2002
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Sales $ 61,786 $ 46,950 $ 139,265 $ 128,221
Cost of Sales 43,463 32,991 98,663 90,250
---------- ---------- ---------- ----------
Gross Profit 18,323 13,959 40,602 37,971
Operating expenses 13,777 11,653 36,834 33,513
---------- ---------- ---------- ----------
Operating income from continuing operations 4,546 2,306 3,768 4,458
Interest and other expense 43 55 218 201
---------- ---------- ---------- ----------
Income before income taxes from continuing operations 4,503 2,251 3,550 4,257
Income taxes 1,675 844 1,332 1,596
---------- ---------- ---------- ----------
Net Income from continuing operations 2,828 1,407 2,218 2,661
Loss from discontinued operations, net of income taxes -- (1,230) -- (2,351)
---------- ---------- ---------- ----------
Net income $ 2,828 $ 177 $ 2,218 $ 310
========== ========== ========== ==========
Basic income per share:
Basic income per share from continuing operations $ 0.54 $ 0.27 $ 0.42 $ 0.49
Basic (loss) per share from discontinued operations -- (0.24) -- (0.43)
---------- ---------- ---------- ----------
Net income $ 0.54 $ 0.03 $ 0.42 $ 0.06
========== ========== ========== ==========
Diluted income per share:
Diluted income per share from continuing operations $ 0.53 $ 0.26 $ 0.42 $ 0.49
Diluted (loss) per share from discontinued operations -- (0.23) -- (0.43)
---------- ---------- ---------- ----------
Net income $ 0.53 $ 0.03 $ 0.42 $ 0.06
========== ========== ========== ==========
Average shares outstanding:
Basic 5,245 5,229 5,245 5,427
Diluted 5,313 5,298 5,309 5,496
See notes to unaudited condensed consolidated financial statements.
4
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002
(Dollars in thousands)
2003 2002
-------- --------
Cash Flows from Operating Activities:
Net income $ 2,218 $ 310
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss from discontinued operations -- 2,351
Depreciation 1,942 1,994
Deferred income taxes and other non-cash items (61) 79
Changes in operating assets and liabilities:
Contract receivables 668 9,847
Inventories (250) (1,246)
Prepayments and other 315 227
Accounts payable 5,685 643
Accrued expenses and other 6,431 2,332
-------- --------
Net cash provided by operating activities 16,948 16,537
Cash Flows from Investing Activities:
Additions to property, plant and equipment (659) (1,356)
-------- --------
Net cash used in investing activities (659) (1,356)
Cash Flows from Financing Activities:
Repayments of long-term debt (6,300) (7,555)
Proceeds from stock option exercise -- 34
Treasury stock purchases -- (2,513)
-------- --------
Net cash used in financing activities (6,300) (10,034)
-------- --------
Increase in Cash and Cash Equivalents 9,989 5,147
Net cash used in discontinued operations (411) (2,218)
Cash and Cash Equivalents:
Beginning of period 432 351
-------- --------
End of period $ 10,010 $ 3,280
======== ========
See notes to unaudited condensed consolidated financial statements.
5
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Summary of Accounting Policies
Basis of Presentation--Anthony & Sylvan Pools Corporation and
Subsidiaries (the "Company") is among the largest residential in-ground concrete
pool sales and installation businesses in the United States and operates in one
business segment. The accompanying unaudited, condensed consolidated financial
statements of the registrant have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Some required information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to these rules and regulations.
In the opinion of management, the unaudited financial statements include all
adjustments, consisting only of normal recurring accruals, considered necessary
for the fair presentation of the financial position and the results of
operations. Operating results for the three-month or nine-month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the full fiscal year. For further information, refer to the
consolidated financial statements and notes included in the registrant's Annual
Report on Form 10-K for the year ended December 31, 2002.
Consolidation--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Inventories--Inventories consist of materials and equipment purchased
for installation or use in pools and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
Revenue Recognition--Revenue from swimming pool installation contracts
is recognized on the percentage-of-completion accounting method based on the
proportion of total costs incurred during the various phases of installation as
a percentage of total estimated contract costs. Revisions in cost and revenue
estimates are reflected in the period in which the facts requiring such
revisions become known. Provision is made currently for estimated losses on
uncompleted installations. The majority of the Company's contracts call for
progress payments to be made while completing individual phases of the
installation until the final phases of installation, at which time the remaining
portion is recognized as a contract receivable. Progress payments in excess of
revenue recognized are classified as billings in excess of costs and estimated
earnings on uncompleted contracts, and are included in accrued expenses.
Contract costs include direct material, labor, subcontract costs and overheads.
Selling and administrative expenses are charged to income as incurred.
Warranty--The Company accrues an estimate of warranty claims using
regression analysis formulas and estimates of the aggregate liability for claims
based on the Company's historical experience. The portion of claims the Company
estimates will not be paid within one year is included in other long-term
liabilities.
Use of Estimates--The preparation of the consolidated financial
statements requires management of the Company to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the unaudited
condensed consolidated financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
Stock Option Plans--The Company applies the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations,
including FASB Interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation, an Interpretation of APB Opinion No. 25," to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market value of the
underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123 and SFAS
No. 148. The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and unvested awards
for the three-month and nine-month periods ended September 30, 2003 and
September 30, 2002.
6
(In Thousands, except per share data): Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net income from continuing operations, as reported $ 2,828 $ 1,407 $ 2,218 $ 2,661
Add stock-based employee compensation expense included in
reported net income, net of tax 18 20 50 60
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all rewards, net of tax (83) (83) (249) (222)
-------- -------- -------- --------
Pro forma net income from continuing operations $ 2,763 $ 1,344 $ 2,019 $ 2,499
======== ======== ======== ========
Income per share from continuing operations:
Basic - as reported $ 0.54 $ 0.27 $ 0.42 $ 0.49
Basic - pro forma $ 0.53 $ 0.26 $ 0.38 $ 0.46
Diluted - as reported $ 0.53 $ 0.26 $ 0.42 $ 0.49
Diluted - pro forma $ 0.52 $ 0.25 $ 0.38 $ 0.45
Reclassifications--Certain reclassifications have been made to the 2002
condensed consolidated financial statements to make the presentation consistent
with the current period.
2. Discontinued Operations and Restructuring Charge
As more fully disclosed in Note 3 of Notes to Consolidated Financial
Statements included in Item 8 of the registrant's Annual Report on Form 10-K for
the year ended December 31, 2002, the Company, in 2002, closed two swimming pool
installation divisions in the Orlando and Southeastern Florida markets. The
consolidated financial statements have been reclassified to reflect those
operations as discontinued. The Company recorded a reserve in 2002, which
consists of severance costs, future lease obligations and other exit costs. The
following is a summary of activity charged against the reserve during the
nine-month period ended September 30, 2003 (dollars in thousands):
Reserves Reserves
At At
12-31-02 Payments 9-30-03
-------- -------- --------
Leases $ 625 $ (302) $ 323
Severance payments 25 (20) 5
Other 216 (168) 48
-------- -------- --------
$ 866 $ (490) $ 376
======== ======== ========
3. Long-Term Debt
The Company had no long-term debt at September 30, 2003. The Company
has a revolving credit facility ("Credit Facility"), as more fully disclosed in
Note 5 of Notes to Consolidated Financial Statements included in Item 8 of the
registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
The Company is in compliance with all of its debt covenants under the Credit
Facility at September 30, 2003.
In July 2003, the Credit Facility was amended to reduce the maximum
amount of borrowing from $35 million to $25 million, based on a review of the
Company's historic and future borrowing needs. As a result, the Company will
reduce its annual Credit Facility commitment fees by approximately $40,000.
7
4. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is based on the combined weighted average number of shares outstanding including
the assumed exercise or conversion of options. The treasury stock method is used
in computing diluted earnings per share. The calculations are as follows:
(In Thousands, except per share data): Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
Net income from continuing operations $ 2,828 $ 1,407 $ 2,218 $ 2,661
Net loss from discontinued operations -- (1,230) -- (2,351)
-------- -------- -------- --------
Net income $ 2,828 $ 177 $ 2,218 $ 310
======== ======== ======== ========
Denominator:
Weighted average common shares outstanding 5,245 5,229 5,245 5,427
Dilutive effect of stock options 68 69 64 69
-------- -------- -------- --------
Denominator for net income per diluted share 5,313 5,298 5,309 5,496
======== ======== ======== ========
Basic income per share:
Continuing operations $ 0.54 $ 0.27 $ 0.42 $ 0.49
Discontinued operations -- (0.24) -- (0.43)
-------- -------- -------- --------
$ 0.54 $ 0.03 $ 0.42 $ 0.06
======== ======== ======== ========
Diluted income per share:
Continuing operations $ 0.53 $ 0.26 $ 0.42 $ 0.49
Discontinued operations -- (0.23) -- (0.43)
-------- -------- -------- --------
$ 0.53 $ 0.03 $ 0.42 $ 0.06
======== ======== ======== ========
Outstanding stock options with prices ranging from $4.07 to $9.03 were
not included in the computation of diluted EPS because the options'
exercise prices were greater than the market price of the common
shares.
5. Product Warranties
The Company provides certain warranties with its swimming pools and
accrues for the liability associated with these warranties using
regression analysis formulas based on historical claims experience. The
changes in the carrying amount of the warranty accrual were as follows
for the nine-month periods ended September 30, 3002 and 2002 (dollars
in thousands):
2003 2002
-------- --------
Balance at beginning of year $ 3,881 $ 3,549
Warranty expense 1,864 1,665
Warranty payments (1,857) (1,152)
-------- --------
Balance at September 30 $ 3,888 $ 4,062
======== ========
6. Litigation
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, the results of all such matters will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
8
7. New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Company has adopted Interpretation No. 46, effective at the
beginning of its first interim period beginning after June 15, 2003. There was
no material impact on the results of operations or financial position of the
Company as a result of the adoption of Interpretation No. 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This statement amends
SFAS No. 133 for decisions made (1) as part of the Derivatives Implementation
Group process that effectively required amendments to SFAS No. 133, (2) in
connection with other FASB projects dealing with financial instruments and (3)
in connection with implementation issues raised in relation to the application
of the definition of a derivative. This statement was adopted by the Company
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. There was no material
impact on the results of operations or financial position of the Company as a
result of the adoption of SFAS No. 149.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
statement requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. Generally, the Statement is effective for financial
instruments entered into or modified after May 31, 2003. The Company has adopted
SFAS No. 150, effective at the beginning of its first interim period beginning
after June 15, 2003. There was no material impact on the results of operations
or financial position of the Company as a result of the adoption of SFAS No.
150.
9
Independent Accountants' Review Report
To the Board of Directors and Shareholders,
Anthony & Sylvan Pools Corporation and subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of
Anthony & Sylvan Pools Corporation and subsidiaries (the Company) as of
September 30, 2003, the related condensed consolidated statements of operations
for the three-month and nine-month periods ended September 30, 2003 and 2002,
and the related condensed consolidated statements of cash flows for the
nine-month periods ended September 30, 2003 and 2002. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Anthony & Sylvan Pools Corporation and subsidiaries as of December 31, 2002, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated February 14, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG LLP
October 21, 2003
Cleveland, Ohio
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this report and
other materials filed with the Securities and Exchange Commission (as well as
information included in oral or other written statements made or to be made by
the Company) contains statements that are forward-looking. All forward looking
statements are based on current expectations regarding important risk factors,
including but not limited to: the costs of integrating acquired businesses;
dependence on existing management; consumer spending and market conditions;
interest rates and weather. Accordingly, actual results may differ from those
expressed in any forward-looking statements, and the making of such statements
should not be regarded as a representation by the Company or any other person
that the results expressed therein will be achieved.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's unaudited condensed consolidated
financial statements. The Company believes the following critical accounting
policies affect its more significant estimates and assumptions used in the
preparation of its condensed consolidated financial statements.
Revenue Recognition - Revenue from swimming pool installation contracts is
recognized on the percentage-of-completion accounting method based on the
proportion of total costs incurred during the various phases of installation as
a percentage of total estimated contract costs. Revisions in cost and revenue
estimates are reflected in the period in which the facts requiring such
revisions become known. Provision is made currently for estimated losses on
uncompleted installations. The majority of the Company's contracts call for
progress payments to be made while completing individual phases of the
installation until the final phases of installation, at which time the remaining
portion is recognized as a contract receivable. Progress payments in excess of
revenue recognized are classified as billings in excess of costs and estimated
earnings on uncompleted contracts, and are included in accrued expenses.
Contract costs include direct material, labor, subcontract costs and overheads.
Selling and administrative expenses are charged to income as incurred.
Warranty - The Company accrues an estimate of warranty claims using regression
analysis formulas and estimates of the aggregate liability for claims based on
the Company's historical experience. The portion of claims the Company estimates
will not be paid within one year is included in other long-term liabilities.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
--------------------------------------------------------------------------------
30, 2002
--------
Net sales from continuing operations of $61.8 million for the three-months ended
September 30, 2003 compared with net sales of $47.0 million reported a year ago.
The increase of $14.8 million or 31.5% in sales was primarily attributable to a
23.2% increase in actual new pool units produced, increases in renovation
activity and a 6.6% increase in average selling prices compared with the same
period last year.
Gross profit from continuing operations increased to $18.3 million in the third
quarter ended September 30, 2003 compared with $14.0 million in the third
quarter of 2002, primarily as a result of the increase in net sales. As a
percentage of sales, gross profit for the third quarter of 2003 was 29.7% which
was consistent with the gross profit rate of 29.7% in the third quarter of 2002.
Operating expenses, which include selling and administrative expenses, were
$13.8 million in the third quarter of 2003, or approximately $2.1 million higher
than operating expenses of $11.7 million in the third quarter of 2002. The
increase was primarily attributable to certain variable costs, including
commissions, that are directly related to the sales increase, and higher
incentive compensation and general insurance costs compared with a year ago. As
a percent of sales, operating expenses declined to 22.3% in 2003 versus 24.8% in
2002.
The Company's effective tax rate for the third quarter ended September 30, 2003
was 37.2% compared with an effective tax rate in the third quarter of 2002 of
37.5%.
Primarily as a result of the above items, the net income from continuing
operations increased $1.4 million to $2.8 million in the third quarter of 2003.
The net income per diluted share from continuing operations was $0.53 in the
third quarter of 2003 compared with net income per diluted share from continuing
operations of $0.26 per share in the third quarter of 2002.
11
In 2002, the Company closed its swimming pool installation businesses in the
Orlando and Southeastern Florida markets. These operations are shown as
discontinued in the financial statements. The net loss from these operations,
net of taxes, in the third quarter of 2002 was ($1.2) million, or ($0.23) per
diluted share. The net income, including discontinued operations, recorded in
the third quarter of 2002 was $0.2 million, or $0.03 per diluted share.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
------------------------------------------------------------------------------
30, 2002
--------
Net sales from continuing operations of $139.3 million for the nine months ended
September 30, 2003 compared with net sales of $128.2 million reported for the
same period a year ago. The increase in sales was primarily attributable to the
combination of a 6.5% increase in average selling prices, a 2.0% increase in
actual new pool units produced and increased renovation activity.
Gross profit from continuing operations of $40.6 million increased $2.6 million
in the nine months ended September 30, 2003 compared with $38.0 million from the
previous year, primarily as a result of the increase in net sales. As a
percentage of sales, gross profit for the first nine months of 2003 was 29.2%
compared with 29.6% in the first nine months of 2002. The decrease in the gross
profit rate was partially attributable to higher warranty expenses compared with
a year ago.
Operating expenses, which include selling and administrative expenses, were
$36.8 million in the first nine months of 2003 compared with $33.5 million in
operating expenses for the first nine months of 2002. The increase was primarily
attributable to certain variable costs, including commissions, that are directly
related to the sales increase, and higher incentive compensation and general
insurance costs which were partially offset by lower advertising expenses in the
first nine months of 2003 compared with a year ago. As a percent of sales,
operating expenses were 26.4% of sales compared with 26.1% a year ago.
The Company's effective tax rate for the nine months ended September 30, 2003
was 37.5%. This is the same effective tax rate as the first nine months of 2002.
Primarily as a result of the above items, net income from continuing operations
was $2.2 million in the first nine months of 2003. This compares with net income
of $2.7 million from continuing operations for the first nine months of 2002.
The net income per diluted share from continuing operations was $0.42 in the
first nine months of 2003 compared with net income per diluted share from
continuing operations of $0.49 per share in the first nine months of 2002. There
were approximately 3.3% less outstanding diluted shares in the first nine months
of 2003 compared with the same period a year ago.
In 2002, the Company closed its swimming pool installation businesses in the
Orlando and Southeastern Florida markets. These operations are shown as
discontinued in the financial statements. The net loss from these operations,
net of taxes, in the first nine months of 2002 was ($2.4) million, or ($0.43)
per diluted share. Net income, including discontinued operations, recorded in
the first nine months of 2003 was $0.3 million, or $0.06 per diluted share.
Liquidity and Capital Resources
For the nine-month period ended September 30, 2003, net cash provided by
operating activities was $16.9 million compared with net cash provided by
operating activities of $16.5 million in the first nine months of 2002. The
increase in comparative nine months' cash flow amounts was primarily
attributable to the combination of larger increases in accounts payable and
accrued expenses in 2003 compared with 2002, partially offset by reductions in
accounts receivable in 2003 compared with 2002. While the actual contract
receivables' balances at September 30, 2003 and September 2002 are similar, the
large reduction in contract receivables in 2002 was primarily attributable to a
special deferred payment program that expired at the end of 2001 which required
customers to make payments of the deferred payment amounts in the first half of
2002. Capital expenditures in the first nine months of 2003 were $0.7 million
compared with $1.4 million in the first nine months of 2002. The majority of the
2003 capital expenditures related to the purchase of computer hardware and
software. $6.3 million of cash provided by operating activities in the first
half of 2003 was used to pay off the Company's bank borrowings at December 31,
2002.
The Company does not have any off-balance sheet financing activities.
The Company amended its credit facility ("Credit Facility") in July 2003 to
reduce the maximum amount of borrowing from $35 million to $25 million based on
a review of the Company's historic and future borrowing needs. The credit
facility is secured by the assets of the Company and matures August 10, 2004.
The Company's borrowing capacity and interest rates under the Credit Facility
are based on its profitability and leverage. Interest is charged at increments
over either Prime or LIBOR rates. In addition, a 50 basis
12
points commitment fee is payable on the total amount of the unused commitment.
There were no borrowings outstanding at September 30, 2003 and the Company is in
compliance with all of its debt covenants under the Credit Facility.
The Company believes that existing cash and cash equivalents, internally
generated funds, and funds available under its Credit Facility will be
sufficient to meet its needs.
Cyclicality and Seasonality
The Company believes that the in-ground swimming pool industry is strongly
influenced by general economic conditions and tends to experience periods of
decline during economic downturns. Since it is believed that the majority of the
Company's swimming pool installation purchases are financed, pool sales are
particularly sensitive to interest rate fluctuations and the availability of
credit. A sustained period of high interest rates could result in declining
sales, which could have a material adverse effect on the Company's financial
condition and results of operations. Conversely, a sustained period of low
interest rates could help offset the impact of any economic downturns.
Historically, approximately two-thirds of the Company's revenues have been
generated in the second and third quarters of the year, the peak season for
swimming pool installation and use. Conversely, the Company typically incurs net
losses during the first and fourth quarters of the year. Unseasonably cold
weather or extraordinary amounts of rainfall during the peak sales season can
significantly reduce pool purchases. In addition, unseasonably early or late
warming trends can increase or decrease the length of the swimming pool season,
significantly affecting sales and operating profit.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to various market risks, including changes in pricing of
equipment, materials and contract labor, and interest rates. Market risk is the
potential loss arising from adverse changes in market rates and prices, such as
commodity prices and interest rates. The Company does not enter into financial
instruments to manage and reduce the impact of some of these risks. The Company
does not enter into derivatives or other financial instruments for trading or
speculative purposes.
The Company is exposed to cash flow and fair value risk arising out of changes
in interest rates with respect to its long-term debt. There have been no
material changes to weighted average interest rates on long-term debt at
December 31, 2002 as more fully disclosed in Note 5 of Notes to Consolidated
Financial Statements included in Item 8 of the registrant's Annual Report on
Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chairman and Chief
Executive Officer of the Company and the Chief Financial Officer of the Company,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of
the period covered by this report. Based upon that evaluation, the Chairman and
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There has been no significant change in our internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No change.
Item 2. Changes in Securities
No change.
Item 4. Submission of Matters to a Vote of the Security Holders
None.
Item 5. Other Information
The Company intends to commence an odd-lot tender offer on
October 28, 2003 to shareholders that own 99 or fewer shares
at a price of $4.00 per share. The offer could result in the
Company deregistering its common shares under the Securities
Exchange Act of 1934. In addition, the common shares would no
longer be eligible for trading on the Nasdaq SmallCap Market.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
31.1* Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a)/15d-14(a)
31.2* Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a)/15d-14(a)
32.1** Certification of Chief Executive Officer of
Anthony & Sylvan Pools Corporation Pursuant
to 18 U.S.C. 1350
32.2** Certification of Chief Financial Officer of
Anthony & Sylvan Pools Corporation Pursuant
to 18 U.S.C. 1350
* Filed herewith
** Furnished herewith
(b) Reports on Form 8-K
On July 25, 2003 the Company furnished a Current
Report on Form 8-K with the Securities and Exchange
Commission. That Current Report on Form 8-K, under
Item 9, included an Anthony & Sylvan Pools
Corporation press release, dated July 24, 2003,
announcing its financial results for the second
quarter and six months ended June 30, 2003.
14
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Anthony & Sylvan Pools Corporation
By: /s/ Stuart D. Neidus
-------------------------------------
Stuart D. Neidus
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ William J. Evanson
-------------------------------------
William J. Evanson
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
October 28, 2003
15